Thursday, March 17, 2016

Fed holds on the interest rate hike, for now

From the Federal Reserve Board press release:
"The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further."
For that reason:
"The Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."
There was one dissenting vote, Esther George the president of the Federal Reserve Bank of Kansas City, who wanted to hike the rate to 0.75%.

Although they cite the international situation as the cause for caution, my hunch is that the slow recovery also played a role. And the doubts about the idea that we are below the natural rate with unemployment at 4.9% must be at the center of Yellen's decision.

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