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Fed Panel Wants Flexibility in Raising Rates

The Federal Open Market Committee March meeting minutes released on Wednesday highlight several changes compared with the previous meeting in January, which are worth noting.

These changes demonstrate that the Fed sees the moderation of economic growth and some softness in the economy, thus making it less likely that the interest rates will be raised in the immediate future. At the same time, the committee is giving itself the flexibility to adjust policy quickly, if necessary. This is seen in the following statements in the committee’s minutes:

  1. Language in the forward guidance

In the minutes, the phrase “patient” is removed from the forward guidance, providing the committee with flexibility to begin raising rates. However, the minutes state that the initial rate rise is unlikely to occur at the committee’s April meeting, and the committee had not decided on the timing of the first rate increase.

  1. Economic situation review

The minutes say that GDP growth moderated in the first quarter of 2015, compared with the statement in January that economic activity expanded at a solid pace over the second half of 2014. Among all of the economic indicators, industrial production and real personal consumption expenditures are the two indicators that decreased in the recent months after rising markedly in the fourth quarter of 2014.

  1. Economic outlook

The committee’s staff lowered its projections of economic growth in the March meeting compared with the forecast in January. The minutes say the lowered projections are largely reflecting the near-term forecasts for household spending, net exports, and residential investment. But the forecast for inflation remained unchanged in the near term as well as in the longer term.

  1. Normalization tools

For the first time, the minutes provide additional details regarding the operational approach in the early stage of policy normalization. They include that the target range for the federal funds rate is 25 basis points; the IOER (interest on excess reserves) rate is set to be the top of the target range; the ON RRP (overnight reverse repurchase agreements) rate is to be the bottom; and the ON RRP facility aggregate capacity is allowed to be temporarily elevated, but is expected to be reduced fairly soon after it commences policy firming.

All in all, the FOMC is on track to start raising interest rates. Even though the timing of the first rate rise is not decided, the policy tools and strategies are getting clearer.

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