Federal Reserve officials' stance on monetary policy is mostly affected by the direction of the economy. Although they raised the federal funds rate in December, current economic conditions may not warrant another increase for a while.
Fed Vice Chairman Stanley Fischer addressed some of the reasoning behind the agency's recent monetary policy decisions.
In December 2015, the Fed raised the federal funds rate for the first time in seven years by 1/4 percentage point to 1/4 to 1/2 percent.
"This ultra-low rate was in keeping with our congressional mandate to pursue a monetary policy that fosters maximum employment and price stability, which we define as 2 percent inflation,"Fischer stated. "Our decision in December was based on the substantial improvement in the labor market and the Committee's confidence that inflation would return to our 2 percent goal over the medium term."
He continued, "I would note that our monetary policy remains accommodative after the small increase in the federal funds rate adopted in December. And my colleagues and I anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, and that the federal funds rate is likely to remain, for some time, below the levels that we expect to prevail in the longer run."
In their last meeting, the Fed left rates unchanged from December, a move that was expected given the rough economic start to 2016.
"Economic data over the intermeeting period suggested that improvement in labor market conditions continued even as economic growth slowed late last year," Fischer explained. "But further declines in oil prices and increases in the foreign exchange value of the dollar suggested that inflation would likely remain low for somewhat longer than had been previously expected before moving back to 2 percent. In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets."
Fischer noted that he could not explain what the Fed will do at its next meeting because they "simply do not know."
"The world is an uncertain place, and all monetary policymakers can really be sure of is that what will happen is often different from what we currently expect," he said. "That is why the Committee has indicated that its policy decisions will be data dependent. That is, we will adjust policy appropriately in light of economic and financial events to best foster conditions consistent with the attainment of our employment and inflation objectives."
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