Released: 15th January 2018
By: Sebastian Alarcon
Federal Reserve Press Releases are issued after the meetings that take place between the different entities, and in these press releases, the decisions taken by the reserve are detailed, such as the results of the voting, which of the presidents of the banks voted, and what are the expectations for the following meetings.
At the June meeting, it was observed by the Federal Open Market Committee (FOMC) that the labour market continued to strengthen and economic activity continued to improve moderately. Salaries and new jobs grew moderately, but solidly since the beginning of 2017, which led to a decline in the unemployment rate. In the months prior to June, there was an increase in household spending as well as fixed investment in businesses. In the annual inflation from May 2016 to May 2017 there was a deceleration in prices and the price indicator (excluding food and energy) remained below the 2% reserve target.
At the June meeting, inflation expectations remained below 2% in the short term, but it was estimated that in the medium term, the objective would be met. In view of the expectations of the labour market and the behaviour of inflation, the committee decided to increase the target range of the federal fund’s rate from 1 to 1.25%. The monetary policy stance remained accommodative to continue supporting the good behaviour of the labour market and inflation.
The committee at the May meeting continued with the expectation of implementing normalisation in the bank’s balance sheet during the year. This program would gradually reduce the holdings of Federal Reserve securities by decreasing the reinvestment of the capital payments of those securities. The board of governors of the federal reserve voted unanimously to increase the interest rate to 1.25% on June 15, 2017.
In the July meeting, the results of the reports presented to the FOMC in June were shown, it was evident that the labour market continued to strengthen as well as economic activity. As in the June press release, the unemployment rate continued to fall, household spending and fixed investment in businesses continued with a positive trend.
The negative aspect of the report was the behaviour of inflation which decelerated in the 12-month period. The expectations of the agents on inflation change in this report to the downside. In the short term and even in the medium term it is not so clear to the objective of 2%. Given this behaviour of inflation, the committee decided to leave the interest rate of federal funds at 1.25%.
In the expectations of the committee, no problem was expected in the development of economic activity so that monetary policy was not going to have many changes in their projections. In the short term they expected to have stable interest rates and below the long-term objective to continue with the positive trend of the labour market and economic growth.
As for the balance sheet of the bank, the reserve had not yet begun its normalisation program but expected to start soon, depending on whether the economy followed that positive path. The board of governors voted unanimously to maintain the interest rate at 1.25%.
At the September meeting, it was concluded that throughout the year the labour market and economic activity had strengthened moderately. The unemployment rate, although it did not continue decreasing, remained stable and with a good performance. The fixed investment in business accelerated showing good signals which contrasted with household spending, which remained stable. Inflation grew slightly, but so far this year it has slowed down remaining below 2%.
The many hurricanes that happened by this date devastated multiple communities and generated millionaire expenses which affected the economy in the short term, but according to the federal reserve, there is historical evidence that is almost null on the effect of these events in the long-term path of the economy. For this reason, the committee was still expecting a rebound in economic activity in 2017 and monetary policy would not have major problems given the projections drawn at the beginning of the year. Gasoline (petrol) and other items could accelerate inflation after these events, so in the medium-term inflation was expected to close at about the 2% reserve target. The committee continued to monitor the economy but noted that the potential risks of the economy had not materialised, so they were very optimistic by the end of the year.
In view of the events and behaviour of inflation, the committee decided to keep interest rates at 1.25%. It was established that in October 2017 the committee would begin the normalisation of the balance sheet of the reserve.
At the November meeting, the committee continued observing the positive behaviour of economic activity and the labour market throughout the year, despite a series of hurricanes affecting various communities in the middle of the year. The number of new employees fell due to these events affecting the unemployment rate in September but decreased in the following months.
Household consumption and fixed investment in businesses continued with the positive trend that they have maintained throughout the year. Gasoline prices increased in the wake of hurricanes, thus increasing inflation in the United States, but with stable prices for goods other than fuel, food and energy. In the following months, the consequences of hurricanes will continue to be felt in economic activity according to the federal reserve. The committee concluded based on the figures presented by the economy that the best thing for the moment was to leave the interest rate unchanged at 1.25% voting unanimously.
Finally, in the December report, the federal reserve observed a strong labour market and a strong acceleration in economic activity. On average, despite natural disasters, wages and new jobs had a positive trend and the unemployment rate remained at low levels even below the long-term rate. In November it was observed that total inflation without food or energy stays below 2%, which is a sign of deceleration compared to the previous year.
Unlike the previous meetings, the committee observed the situation of the economy and the labour market and decided to increase the interest rate of the federal funds to 1.5% on December 13. The vote was unanimous to raise rates on the board of governors, and the districts that voted at this meeting were Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, Dallas, and San Francisco.
In conclusion, in the press reports delivered to the public the federal reserve shows a summary of economic activity, the labour market and the behaviour of inflation which are the most important variables when establishing monetary policy. During 2017, a robust economy was observed despite some natural disasters and a healthy labour market with good dynamics. The negative point during the year was the behaviour of inflation which slowed down compared to the previous year, but this was not enough for the federal reserve to raise the economy’s intervention rate. In total there were three increases during 2017 showing positive expectations from analysts and the board of governors on the future of the US economy. In addition, since October, the normalisation program has started in the balance sheet of the federal reserve, which means that the reserve will get rid of several assets that it has on its balance sheet, which will take liquidity out of the market, after applying this accommodative policy to recover the economy from the crisis of 2007.