Dovish Fed keeps policy unchanged

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WASHINGTON, D.C.: The Federal Reserve stuck to its forecast for an initial interest rate rise in 2015 on Wednesday (Thursday in Manila) but cut its forecast for US growth slightly.

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Holding to its cautious dovish stance on inflation, the Federal Open Market Committee (FOMC) did not change any language it uses to signal its rate plans, saying any increase will happen only a “considerable time” after the October end to the bond-buying stimulus program.

Although the economy continues to expand “at a moderate pace,” the monetary policy makers saw growth next year at just 2.6 percent to 3.0 percent, slower than the 3.0 percent to 3.2 percent level they forecast three months ago.

But they improved their outlook for unemployment, saying the jobless rate will fall from the current 6.1 percent to 5.4 percent to 5.6 percent by the end of next year, slightly better than the previous outlook.

Meanwhile the FOMC stuck to its plan to wind up the quantitative easing program, buying up bonds to inject money into the economy and to keep long-term interest rates low.

The program, which was $85 billion a month in December 2013, has been reduced steadily and will be ended in October, if current trends in the economy do not change, the FOMC said.

The FOMC’s two-day meeting had been expected to review whether the Fed should alter its outlook for an increase in the zero percent to 0.25 percent federal funds interest rate, expected for the middle of next year or later.

So-called inflation hawks were pushing for the FOMC to allow for a much earlier rate hike in their language, including eliminating the “considerable time” phrase.

Two FOMC members, both known hawks, voted against the policy statement, one arguing that the phrase binds the Fed’s hand on policy, and the other that the economy is improving and that the ultra-low rate policy, in place for nearly six years, is helping pump up stocks and other assets to unreasonable levels.

Behind the meeting was the debate over whether the labor market needs continued support from ultra-low rates, and whether that risks an outbreak of inflation, which has increasingly dominated monetary policy discussion this year.

The unemployment rate has fallen faster than the FOMC has expected, losing two full percentage points in two years to the current 6.1 percent.

Fed Chair Janet Yellen has argued that, nevertheless, there remains significant slack in the market, as shown by a historically low participation rate and millions of underemployed and jobs market dropouts.

Supporting her position, wages have not rebounded with the economy, and inflation remains firmly in check. Earlier Wednesday the August consumer prices data, for instance, showed the first fall in more than a year, and the overall consumer price index was up 1.7 percent from a year ago.

But complicating the picture is slow or slowing growth in Europe, Asia and Latin America—suggesting the Fed should maintain some kind of stimulus—and worries about inflated asset prices in the United States and elsewhere that are blamed on too many years of easy money.

Markets, which were flat before the announcement, gained in its wake.

The S&P 500 was up 0.4 percent and the Dow Jones Industrial Average rose 0.3 percent.

The dollar, also little-changed ahead of the Fed statement, remained steady.

AFP

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