After a two-day meeting, the Federal Open Market Committee has opted to keep the federal funds interest rate as-is—a surprise to many, given the widely held assumption that not one, but two more rate hikes were on the agenda for 2017.

According to the Federal Reserve, the improving labor market, moderate job gains, a lower unemployment rate, and steady inflation all factored into the Committee’s decision.

A statement from the Federal Reserve said: “In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”

Though economic growth has been slow for the first quarter, the Committee stated that Q1 was likely “transitory” and that “with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.”

According to Robert Denk, Assistant Vice President for Forecasting and Analysis at the National Association of Home Builders, March was a “bad month,” economically speaking, but April could be promising—and the FOMC was right to bank on that.

“The seeds for a quick rebound are already in the ground,” Denk said. “An April rebound in payroll growth can be expected if unusually warm weather accelerated hiring in January and February at the expense of March … the FOMC’s exercise in accentuating the positive can be justified in light of the progress to date and the underlying trends in job growth, the unemployment rate, wage and income gains, household spending and inflation. A long-awaited uptick in business fixed investment is another reason to turn a blind eye toward the weak March numbers.”

Curt Long, Chief Economist for the National Association of Federally-insured Credit Unions, agreed that the FOMC’s decision wasn’t all that surprising.

"The FOMC is not overreacting to the mediocre economic data received in recent months,” Long said. “The committee seems convinced that the overall trajectory of the economy remains solid. We are still on track for a rate hike at the committee's next meeting in June, although poor jobs data later this week could cloud the issue.”.

The FOMC raised the federal funds interest rate in March from 0.75 to 1 percent. It was largely expected to increase the funds rate two more times over the course of 2017, though after Wednesday’s announcement, the likelihood of that remains to be seen.

“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” the Fed stated. “The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

The FOMC will meet again June 13.

Courtesy of Aly J. Yale


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