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Home | Mises Library | FOMC Keeps Rates Steady

FOMC Keeps Rates Steady

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Tags The Fed

05/03/2017C.Jay Engel

At 2:00 pm Eastern, the FOMC made their policy announcement as their meeting came to an end. As expected the Fed did not raise the Federal Funds rate target at this May meeting. 

Two items are in focus now, however. The first is the possibility of a June hike. As always, the Fed wants be clear that such a move is “on the table.” Prior to the meeting, the June hike probability was around 70% and have now jumped to 90%. These odds will adjust over the rest of the week in response to the FOMC statement and the plethora of Fed member speeches this Friday. While the Fed doesn’t want to stick hard and fast to a timetable of their hikes, they do seem to be dedicated recently to appearing reliable. They said they’d aim for 3-4 hikes this year. Though of course as Thorten Polleit points out this morning, they will likely chicken out. FOMC on rate hikes:

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. 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.

The second is the balance sheet issue. This has been the theme recently as the Fed is giving the impression that policy normalization is on the horizon. That is, the Fed alleges that it has the wherewithal to actually trim its $4.5t balance sheet. Normalization would take it back below $1t, at least. Yeah right. Nevertheless, the minutes of this May meeting will be released on May 24th and we will have a better idea at that time as to how in depth they covered this issue. Here is the FOMC on the balance sheet: 

The Committee is maintaining its 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, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

These policy decisions come on the back of the lowest GDP growth rate in 3 years. And yet, the FOMC announcement did reveal they are positioning the GDP situation and other "soft data" weakness as "transitory." This means that it is not the mark of new economic problems, just sort of an outlier. But knowing the Fed, when push comes to shove, the only thing they know how to do is suppress interest rates and increase the money supply. 

In sum: nothing new here!

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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