State of the Economy, Top Stories

Fed Says Economy Improving But Not Enough To Cause Early Rate Hikes

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The Fed has made its decision and released a statement detailing its view on the economy, inflation, the jobs market and the future of monetary policy. Below are the highlights.

  • Fed continues to "taper" QE bond buying program by another $10 billion – as expected
  • Says economic activity rebounded in Q2
  • Says labor market conditions improved as unemployment rate has declined further
  • But… and this is new… "a range of labor market indicators suggests that there remains significant underutilization of labor resources"
  • No change in Fed Funds rate – as expected
  • Household spending appears to be rising moderately
  • Inflation has moved somewhat closer to the Committee's longer-run objective
  • Longer-term inflation expectations have remained stable

From the FOMC statement, "The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat."

In terms of future monetary policy the statements says, "The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee 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 Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases."

There was one dissent to the statement from Charles Plosser. The statement says Plosser dissented "because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals."

All in all, the statement supports the Fed's current path. The Fed is essentially saying that the economy has improved but not enough for them to deviate from the plan. This is being viewed as a "dovish" statement as Yellen appears to be erring on the side of growth at this stage of the game.

Stocks have been volatile throughout the session and moved up off the lows after the statement was released.

 


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About the Author

David Moenning is the Chief Investment Officer at Sowell Management Services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 29 years.