FED Economical Assessment 150128

WASHINGTON (Jan 29): The Federal Reserve boosted its assessment of the economy and down played low inflation readings while repeating a pledge to remain “patient” on raising interest rates. The Federal Open Market Committee described the expansion as “solid”, an improvement over the “moderate” performance it saw in December. It substituted “strong” for “solid” in its evaluation of job gains after a meeting today in Washington. While inflation “is anticipated to decline further in the near term,” the FOMC said in a statement, it is likely to rise gradually toward its 2 percent goal “over the medium term” as the impact of low oil prices diminishes.

Policy makers saw a bonus in cheap energy, saying it’s boosting consumer buying power.
Stocks fell as the statement reinforced expectations that the Fed will raise interest rates this year for the first time since 2006. One caveat: officials will take “international developments” into account when considering an increase, language that sent bond yields lower. “The Fed’s decision about the timing of liftoff is not as sensitive to low inflation as before,” said Laura Rosner, a US economist at BNP Paribas in New York and a former researcher at the New York Fed. “Inflation is one of many factors that will be considered in deciding when to raise rates. The inflation undershoot is no longer receiving special emphasis.”

Clause dropped
The Fed also dropped a clause from its December statement that the assurance of patience was consistent with a previous pledge to hold rates low for a “considerable time”, especially if “projected inflation continues to run below” the 2 percent target. The Fed has kept its main interest rate near zero since December 2008. All 10 voting FOMC members backed the policy statement, marking the first unanimous decision since June.

Robust economic growth is giving Fed officials reason for optimism, even as weaker global demand and a stronger dollar cut into overseas earnings of companies such as Procter & Gamble.
Since their last meeting, Fed officials learned that the world’s largest economy grew at a 5 percent annual pace in the third quarter, the most since 2003.
A report on Friday may show growth of 3.1 percent, still well above the post-recession average of 2.2 percent, according to a Bloomberg survey of economists.

Six-year low
Unemployment is at a six-year low of 5.6 percent, and the economy added 252,000 workers last month to cap the biggest annual gain since 1999 with growth of almost 3 million jobs. Even as the Fed approaches its goal of full employment, its second mandate, for stable prices, remains well out of reach. The Fed’s preferred inflation gauge, personal consumption expenditures, rose 1.2 percent in November from a year earlier and has lingered below the central bank’s 2 percent target for 31 months.

Market-based expectations for inflation in the five years starting five years from now tumbled earlier this month to 1.76 percent, the lowest since 1999. Oil prices near the lowest in almost six years signal inflation is likely to remain muted. West Texas Intermediate crude futures fell to US$45 a barrel this week from US$107 in June. Economic reports yesterday indicated that cheap oil is a boon for households and a mixed blessing for companies.

Consumer confidence
Consumer confidence soared in January to the highest level in more than seven years as gasoline prices fell, while orders for durable goods unexpectedly dropped for a fourth month, signalling the global slowdown is weighing on manufacturers. Another source of concern for some policy makers: stagnant wages, which point to continued labour-market slack. Average hourly earnings increased 1.7 percent over the 12 months ended in December, the smallest gain since October 2012. Fed officials, including San Francisco Fed President John Williams and Atlanta’s Dennis Lockhart, have signalled that a midyear increase would be the appropriate.

Fed Chair Janet Yellen suggested at her December press conference she’s in no rush to raise rates.
She said the reference to being patience means the committee “is unlikely to begin the normalization process for at least the next couple of meetings”. Diminishing inflation expectations helped push yields on the 10-year Treasury note to 1.71 percent earlier this month, the lowest since May 2013.
It was 1.82 percent late yesterday.

The Standard & Poor’s 500 Index has declined 1.4 percent this year through yesterday amid disappointing fourth-quarter results from companies including Caterpillar and Microsoft.
A cooling global outlook is also giving policy makers pause. The International Monetary Fund last week made the steepest cut to its global-growth forecast in three years.

The FOMC gathering is less than a week after the European Central Bank announced an expanded asset-purchase program of up to 60 billion euros (US$69 billion) a month to spur growth and counter deflationary pressures, highlighting the diverging prospects for two of the world’s largest economies.