The Federal Reserve concluded its latest two-day Federal Open Market Committee (FOMC) meeting within the past hour and, as expected, voted to further pare its monthly bond buying program and to maintain its aggressively accommodative posture on its short-term interest rate structure. Such borrowing levels remain near zero, and we do not expect the Fed to start raising them until 2015 or later.
As to the aforementioned paring in bond purchases to the tune of another $10 billion a month, the Fed cited, as reasons for this action the following: It noted that growth in economic activity had rebounded in recent months, but that things continue to press forward at a moderate pace. Also, it said that household spending appeared to be rising moderately, as well, but that inflation was still running below the Fed's desired target, which of 2%. This statement came in spite of the report of a sharp 0.4% rise in the May Consumer Price Index.
Importantly, the Fed again said, as it has at the conclusion of past FOMC meetings that it may keep the federal funds rate below normal levels for some time yet, even after inflation and employment levels return to a more normal path. The economy had gone into a severe slump during the 2007-2009 recession, by some accounts the worst since the Great Depression, and the subsequent upturn has been less than fulfilling. Thus, the long period of expected continued aggressive accommodation.
It also should be noted that Fed officials also signaled that they expect to raise short-term interest rates a bit faster than previously forecast in 2015 and 2016. The bank now sees the fed funds rate target closer to 1.25% at the end of 2015 than the 1.00% it had earlier anticipated. The central bank also expects the fed funds target to move up to 2.50% by the end of 2016 rather than the 2.25% it had seen at one point.
The reason for this slightly more aggressive rate posture is that the Fed thinks the economy will grow at a rapid pace in 2015 and 2016 following this year's expected uneven gait. While the Fed did reduce its growth outlook for this year, it sees the lower GDP target as reflective of the recent harsh winter. However, it sees those effects as not long lasting. Hence, the more bullish upward rate expectations longer term.
Overall, this was, we believe, a positive assessment of the state of economic affairs in our country and should prove rather benign to even cautious investors. The stock market's initially positive response, albeit a mild one in that regard, probably underscores the benign nature of the latest FOMC statement.At the time of this article's writing, the author did not have positions in any of the companies mentioned.