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FOMC Meeting Deems Economy Unprepared for a Rate Increase

exit-recoveryAlthough Federal Reserve officials determined that economic activity is expanding moderately and job gains are increasing, the federal funds rate will remain the same at a target range of 0 to ¼ percent, according to the recent Federal Open Market Committee (FOMC) June meeting.

The Committee determined that labor market indicators that underutilization of labor resources have diminished slightly, and growth in household spending has been moderate, while the housing sector showed some improvement. However, business fixed investment and net export remained soft. More importantly, inflation is still running below the Committee’s objective of 2 percent, reflecting earlier drops in energy prices and falling prices of non-energy imports. Looking ahead, the Committee still expects a moderate pace of GDP growth, with continuing job gains and lower energy prices supporting household spending.

“The Committee continues to judge that the first increase in the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” said Janet Yellen, FOMC chair. “At our meeting that ended today, the Committee concluded that these conditions have not yet been achieved. It remains the case that the Committee will determine the timing of the initial increase in the federal funds rate on a meeting-by-meeting basis, depending on its assessment of incoming economic information and its implications for the economic outlook.”

FOMC Chair Yellen also emphasized that “the importance of the initial increase should not be overstated: The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate in order to support continued progress toward our objectives of maximum employment and 2 percent inflation.”

The existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction will be maintained by the committee, which will help balance financial conditions.

The unwritten path for federal funds is dependent upon the meeting participants’ individual forecasts for economic growth, employment, inflation, and other factors,” Yellen noted.

“If the expansion proves to be more vigorous than currently anticipated and inflation moves higher than expected, then the appropriate path would likely follow a steeper and higher trajectory; conversely, if conditions were to prove weaker, then the appropriate trajectory would be lower and less steep,” Yellen said. “The Committee will continue its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. The Committee’s sizable holdings of longer-term securities should help maintain accommodative financial conditions and promote further progress toward our objectives.”

Mark Fleming, chief economist at First American told MReport that the rising concern about the global economy, stemming from China and Greece concerns are downwardly affecting mortgage rates.

“The Fed indicated some concerns with China and Greece in their June meeting, which is quite prescient, given events in both countries and the release of the meeting minutes this week," Fleming said. "In addition to not raising rates, the ‘flight to safety’ being driven by global economic uncertainty is driving down treasury yields, which are the economic underpinning of mortgage rates. This should put downward pressure, at least in the short-term, on mortgage rates. We may, yet again, see sub 4 percent 30-year fixed-rate mortgages. This would act as modest positive stimulus in the housing and mortgage markets. Whether that would be temporary or long-run will have more to do with how global financial markets sort out the risk of “Grexit” from the Eurozone and fluctuations in China’s stock market.”

Robert Denk, assistant VP for forecasting and analysis for the National Association of Home Builders (NAHB) noted that all but one member of the committee agreed that more evidence would be needed to prove that economic growth, the labor market, and inflation are strong enough to raise the federal funds This would mark the beginning of monetary policy normalization, he added.

Denk also suggests that the first increase can be expected at the September FOMC meeting, when developments in domestic and global economies are strong enough to justify increasing rates, or weakened to where no sign of an increase will occur this year.

“By the September 16-17 meeting, the advance estimate and first revision of GDP growth in the second quarter will be available, the Labor Department’s jobs reports will be available for an additional three months, and inflation indicators for at least two additional months will have been released,” Denk said. “The committee judges that economic conditions continue to improve and that the worst of the downward pressure on inflation from declining energy prices, as well as import prices from a strong dollar, appears to have abated. However, the impact on growth from the uncertainty surrounding negotiations between Greece and its creditors, and a slowing Chinese economy remain concerns.”

Click here to view the FOMC's complete press conference.  

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.
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