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US Federal Reserve – FOMC Statement dated 19 March 2014

Summary of FOMC Statement

  • – The Federal Open Market Committee (FOMC) confirmed that based on information received since January, growth in growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions
  • – Labour market indicators on balance showed further improvement
  • – Household spending and business fixed investment continued to advance
  • – Fiscal policy is restraining economic growth, although the extent of restraint is diminishing
  • – Inflation has been running below the Committee’s 2% longer-run objective, but longer-term inflation expectations have remained stable
  • – FOMC expects that economic activity will expand at a moderate pace and labour market conditions will continue to improve gradually
  • – FOMC sees risks to the outlook for the economy and the labour market as nearly balanced
  • – Beginning April, FOMC decided to make a further reduction of $10 billion in the pace of its asset purchases and will add $55 billion per month to its holdings of Treasury and mortgage-backed securities
  • – FOMC will likely reduce the pace of asset purchases in further measured steps at future meetings.
  • – However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the outlook for the labour market and inflation
  • – In determining how long to maintain the current 0 to 0.25% target range for the federal funds rate, FOMC will assess progress toward its objectives of maximum employment and 2% inflation
  • – FOMC continues to anticipate that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below 2% longer-run goal
  • – FOMC currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run

Comments

  • – Real GDP Growth since GFC at moderate pace justifying accommodative monetary policy by US Fed. Economic activity in first quarter of 2014 probably impacted by winter storms as indicated in FOMC statement
  • – Subdued Inflation allowed US Fed to continue stimulating US economy with highly accommodative monetary policy
  • – Unemployment has been coming down steadily in the US over the last four years and is now at 6.7%
  • – Inflation at 1.2% remains subdued allowing the US Fed to continue with its highly accommodative monetary policies.
  • – The US Fed has now completely dropped the linkage of an unemployment rate below 6.5% and its low interest rate policy
  • – The US Fed is now saying that it anticipates
    • – that it likely will be appropriate to maintain the current 0-0.25% range for the federal funds rate for a considerable time after the asset purchase program ends and
    • – that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run
  • – The US Fed will continue to reduce the asset purchases by $10 billion as long as unemployment keeps on decreasing
  • – The US Fed seems quite confident that risks to the economic recovery are now less and the economic recovery is now sustainable.

Intralink_StrategyPaper_Summary of FOMC Statement – March

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