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US Federal Reserve – FOMC Statement dated 29 January 2014

Summary of FOMC Statement

  • The Federal Open Market Committee (FOMC) confirmed this morning that based on information received since December, growth in economic activity picked up in recent quarters.
  • Labour market indicators showed further improvement.
  • 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.
  • Risks to the outlook for the economy and the labour market have decreased.
  • The Committee decided to make a further measured reduction of $10 billion in the pace of its asset purchases.
  • The Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.
  • However, asset purchases are not on a prescribed course, and the Committee’s decisions about their pace will remain contingent on the outlook for the labour market and inflation.
  • The Committee anticipates that it will likely be appropriate to maintain the current target range (0 to 0.25%) for the federal funds rate well past the time that the unemployment rate declines below 6.5%.

Comments

  • GDP numbers for the 4th Quarter of 2013 is due for release on Friday morning (US time). GDP growth accelerated in the US in the third quarter of 2013 (see graph) and it would seem from the Fed’s statement about economic activity picking up, that this trend of accelerating growth continued in the 4th Quarter.
  • As can be seen from the Graph, Unemployment has been coming down steadily in the US over the last three 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.
  • Because the Unemployment Rate at 6.7% is now close to the US Fed’s threshold of 6.5% for increasing interest rates, the US Fed added this to their statement:”…… it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee’s 2% longer-run goal.”
  • 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 the economic recovery in the US is now sustainable.

Conclusion

The outlook for the US economy is positive with an economic recovery that is well ahead of other major economies in the developed world, including Australia.  A sharp increase in economic activity in Australia is expected from mid-2015 onwards mainly driven by an increase in exports. In the interim (or transition period), Australia will have to deal with rising unemployment and below-trend real growth. Higher than expected Inflation over the last 2 quarters will likely cause the RBA to remain on hold with interest rates.

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