Banking and Finance Law Daily FOMC raises ‘funds’ rate; economic outlook strengthens
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Wednesday, March 21, 2018

FOMC raises ‘funds’ rate; economic outlook strengthens

By Thomas G. Wolfe, J.D.

Based on information it has received since it last met in late January 2018, the Federal Open Market Committee unanimously decided to raise the target range for the federal funds rate by 0.25 percent to set a new 1.50-percent to 1.75-percent range. According to the FOMC, economic activity has been "rising at a moderate rate," and the labor market has continued to strengthen. Job gains have been "strong" in recent months, and the unemployment rate has "stayed low."

Economic outlook. The FOMC reported that, generally, the economic outlook has strengthened. Still, the growth rates of household spending and business fixed investment "have moderated from their strong fourth-quarter readings." On a 12-month basis, both overall inflation and inflation for items other than food and energy have "continued to run below 2 percent." According to the Committee, market-based measures of inflation compensation have "increased in recent months but remain low." Meanwhile, survey-based measures of longer-term inflation expectations "are little changed, on balance."

Based on its findings, the FOMC indicated that near-term risks to the economic outlook appear "roughly balanced," but the Committee will continue to monitor inflation developments closely. At the same time, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a "moderate pace," labor market conditions "will remain strong," and inflation is expected to "move up this year and to stabilize around the Committee’s 2 percent objective over the medium term."

In communicating its economic outlook, the FOMC released charts and graphs depicting its economic projections.

Asset purchases. In the fourth quarter of 2017, the FOMC implemented its "balance sheet normalization program." As previously reported, the program was designed to "gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities."

Federal funds rate. In view of realized and expected labor market conditions and inflation, the FOMC decided to increase the federal funds rate to the 1.50- to 1.75-percent range. In connection with future determinations of the timing and size of an adjustment, the Committee "will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation." According to the FOMC, this assessment "will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."

Primary credit rate. The primary credit "discount" rate is the interest rate charged for short-term credit extensions to depository institutions.

As reflected in its March 21, 2018, "Decisions Regarding Monetary Policy Implementation," the Fed voted unanimously to approve a 0.25 percentage increase to the primary credit discount rate. As a result, the primary credit discount rate is set at 2.25 percent, effective March 22, 2018. The Fed approved requests to establish the new rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Kansas City, Dallas, and San Francisco.

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