FOMC Meeting Ends: Fed Keeps Rates the Same

“…the Committee decided today to keep the target range for the federal funds rate at 0 to 0.25% and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014.”: an excerpt from the FOMC statement released Tuesday afternoon.

Also cited in the report were a ‘modest expansion in the [U.S.] economy’, expectations of ‘stable longer term inflation’, and some slowing in global growth. The Fed has a double responsibility to promote both price stability and maximum employment, although this is disputed by some economists, and politicians. In the current report the Committee expects that ‘… the unemployment rate will decline only gradually toward levels that the committee judges to be consistent with its dual mandate.”, stating at he same time that, “… over the coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate”.

The Fed performs a delicate balancing act between policing the price level and fostering full employment (the ‘dual mandate’), and the remedies for each problem are opposite each other. The December consumer and producer price level increases were innocuous, permitting the Fed to leave the federal funds rate – the rate at which banks borrow from each other – at its extremely low level, for now.

However, as economies approach full(er) employment, shortages also appear in the production processes that can indeed set off inflationary worries. The U.S. economy’s full employment level had been long thought of as around 5.5%, but during the 1990s the rate went below 4% with little increase in the price level. The national unemployment rate is currently 8.5%, so we might have a long way to go.

The current program to extend the average maturity date of the Fed’s holding of securities was also continued on Tuesday, according to the policy statement. The size and composition of these holdings will be ‘regularly reviewed’.

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