What did the Fed decide? (Commentary to the Federal Reserve's decision of July 26, 2017)
While maintaining the base interest rate in the target range of 1.00% -1.25%, the Federal Open Market Committee of the US Federal Reserve commented on its decision and the current economic condition in the country:
The Fed noted the continued increase in economic activity at a moderate pace this year, further improving the situation in the labor market due to a stable average growth of jobs since the start of the year and a reduction in unemployment.
The Fed states that during the period between the policy meetings, both household spending and business investments continued to grow.
The Fed continues to view long-term inflation expectations as stable. At the same time, the overall inflation and basic inflation estimated on a 12-month basis, which does not take into account energy and food prices, have declined and remain below 2%. However, offsetting the same impact on the inflation from the markets' side continues to be achieved at a small extent.
The Fed aims, in accordance with its authority, to promote maximum employment and price stability. The Fed still expects that the gradual normalization of monetary policy will help economic activity expand at a moderate pace and further strengthen the labor market. Annual inflation is expected to remain slightly below 2% percent in the near future, but should stabilize near the Fed's 2% target level in the medium term. Short-term risks for the economic outlook look looked fairly balanced, but the fed will continue to closely monitor inflation.
Taking into account the already achieved and expected parameters of the labor market and inflation, the Fed decided to keep the interest target rate for the federal funds at 1.00%-1.25%. The basic principles of monetary policy will continue to be flexible enough, thereby supporting further improvement, to some extent, of labor market conditions and a steady return of inflation to a level of 2%.
In determining the timing and scope of future regulation of the target interest rate range for federal funds, the Fed will be guided both by the achieved and the expected developments in moving towards long-term goals of full-employment and inflation at 2%. This approach will be based on a wide range of information, including parameters of market conditions, indicators of inflationary pressures and inflation expectations, financial and international events. The Fed will closely monitor the actual and expected inflationary process in relation to its proportional target inflation rate. The Fed expects that economic conditions will develop in a way that will ensure a smooth hike in the interest rate for federal funds, and it will likely remain, for some time, below the levels that are expected to persist over the long term. However, the actual trajectory for federal funds rate will depend on economic trends in accordance with the incoming data.
Currently, the Fed continues its current policy of reinvesting income from its mortgage and debt securities in its portfolio into agency mortgage securities and investing in auction proceeds from the repayment of existing Treasury securities to purchase their new volumes. The Fed is set to begin implementing a program to normalize its balance sheet in a relatively short time, provided that the pace of economic development coincides with the expected. This program was outlined in the accompanying annex, published on June 17, to the document outlining the main principles and plans of the normalization strategy.
The current fundamentals of monetary policy were adopted unanimously by the 9 voting members of the US Federal Reserve.
