Federal Reserve updates including rates, news and forecasts
December 17, 2014
It is the financial sector's biggest spectator sport: guessing what the Fed will say and do at the conclusion of each Federal Open Market Committee meeting.
Today's meeting brought only a change in words, not deeds. Often, however, that is enough to send markets scrambling.
Federal Reserve wordplay
The key wording change involved backing away from a phrase the Fed had been using to characterize how long it planned to keep short-term rates near zero. "For a considerable time" had been the recurring refrain, but this time the Fed merely said it expected to be "patient" in deciding when to return rates to more normal levels. However, as if concerned that even this was too rash a change in wording, the Committee went on to say it felt this stance consistent with its earlier pledge to keep rates near zero for a considerable time.
What is probably more significant than this bit of wordplay about rates is what the Fed had to say about the conditions that will drive its policy going forward -- specifically, employment and inflation.
The Fed notes expressed satisfaction with progress in the labor market, and indeed, job creation has been on a roll throughout most of 2014. One could even infer that the Fed would have been ready to raise short-term rates if it were not for the other major component of the Fed's mandate, which is price stability. Here, the Fed continued to express concerns that inflation has been too low.
The Fed meeting ended on a day when the Bureau of Labor Statistics announced that the Consumer Price Index had declined by 0.3 percent in November, and had gained only 1.3 percent over the past year. This once again raises the specter of deflation, which has been a major reason why the Fed has been hesitant to raise rates. The chief culprit in the recent drop in prices is the falling value of oil.
Still, there is reason for hope. The Fed notes say they expect inflation to firm up as the labor market continues to improve, and it describes the impact of lower energy prices as "transitory."
Implications for rates
In total, the Fed's latest comments seem to suggest that the Fed would not be surprised if rates were to rise in 2015. Employment is already on track, and inflation is likely to rebound as the labor market strengthens and as prices get past the temporary impact of the collapse in the oil market. In that scenario, expect mortgage rates to move first, because they have to anticipate a long-term time horizon. Shorter-term rates like savings account rates can afford to play more of a waiting game.
The main potential snag in this scenario is if oil does not stabilize in 2015. This would bring more deflationary pressure to bear, and could be indicative of enough global economic weakness to set off another stretch of low rates.
About the Federal Reserve
The Federal Reserve serves as the central bank of the United States. It was founded in 1913 by Congress for the purpose of strengthening the nation’s financial and monetary stability. Today, the Fed serves several duties in the nation’s economy.
These roles include regulating financial institutions, seeking to foster prosperity in the financial market, providing services to financial institutions, and influencing credit and monetary conditions for the purpose of a stable economy.
The Federal Open Market Committee (FOMC) meets several times each year and steers many key parts of Federal Reserve policy, including guiding the target range of the federal funds rate. The committee consists of 12 members.
Federal Reserve policy options
Options the Federal Reserve has for manipulating the economy include:
- Altering the federal funds rate target
- Altering the discount rate and its spread from the federal funds rate
- Making open-market purchases of mortgages securities and Treasury bonds
- Revising the language in the Fed's official statement to extend the period of time that interest rates are anticipated to be low
- Increasing the money supply