Federal Reserve: Economy Expanding at ‘Moderate Pace’

The U.S. Federal Reserve on Wednesday indicated it believes the American economy continues to expand at a moderate pace and would be able to handle a small hike in short-term interest rates.

In a statement, the Federal Open Market Committee reaffirmed its view that the current 0% to 0.25% percent target range for the federal funds rate remains appropriate, however, it said if indications are that inflation is starting to run greater than its goal of a 2% annual increase, “then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.”

Fed policy makers said labor market conditions have improved further since they met last in October, with solid job gains and a lower unemployment rate. They also noted household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow, and inflation remains below the Fed’s target.

“As expected, the Fed opted to keep rates unchanged and continued to provide forward guidance, although in a slightly different manner,” said Sterne Agee Chief Economist Lindsey Piegza. “The Fed opted to keep the ‘considerable time’ phrase but only to reassure the market that the new ‘patient’ language implied the very same commitment to accommodative policy."

She said the Fed continues to maintain a commitment to accommodation and will furthermore continue to base monetary policy on incoming data.

“All along the Fed has been data-dependent, meaning that should the economy improve at a faster pace, the Fed is poised for nearer-term rate increase,” said Piegza. “If, however, the economy slows or fails to meet expectations, the Fed will extend the timeline for rate increases.”

She pointed out Federal Reserve Chairman Janet Yellen's suggestion that the market should not expect a rate increase within the next two meetings or in the next “several,” although, Yellen said, committee members have suggested that at some point in 2015 it is likely that rates will increase.

“However, as the chairman explained throughout the press conference, the belief of a 2015 timeline is based on the Fed’s expectations of above trend growth, a further decline in unemployment, and additional improvement in labor market conditions,” said Piegza. “Furthermore, Yellen noted that these expectations are widely divergent among individual committee members and could quite possibly prove to be overly optimistic.”

According to Piegza, over the past four years, the Fed’s expectations have outpaced reality in terms of growth and are a good reminder why monetary policy may prove more efficient to be based on incoming data than expectations alone.

“For example, think back to 2010 when the Fed expected 3% gross domestic product and rate increases the following year, and yet, in 2011, the economy fell short, posting 1.6% growth,” said Piegza. “Here we still sit, four years later, talking about the first rate increase that was supposedly occurring ‘next year’ for the past several years."

You can read the Federal Reserve’s entire statement on its website.