No Change in Policy as FOMC Cites Risks from "Global Developments"

Economic Pulse
September 17, 2015
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The Federal Open Market Committee reaffirmed its policy rate, averting what would have been the first rate hike since 2008. While the characterization of domestic conditions was similar to descriptions made at the July policy meeting (“economic activity is expanding at a moderate pace”) the Committee opted not to change policy due to heightened global uncertainties. Thursday’s statement noted that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Risks to the outlook for economic activity and the labor market continued to be described as “nearly balanced,” even as the Committee sounded a note of caution by adding the phrase “..but is monitoring developments abroad.”

In the press conference following the policy announcement, the Chairwoman cited “notable volatility in the financial markets” as measured by the drop in equity prices, the appreciation of the dollar, and the widening of risk spreads, each of which has served to tighten financial conditions and potentially put further downward pressure on inflation. Reflecting the concern over the pace of price increases, the FOMC’s latest projections (Table 1) show a much lower rate of headline inflation in 2015 and 2016, with inflation not returning to target until 2018. And while growth is forecast to be stronger this year, GDP growth for the next few years was trimmed versus June’s forecasts, with a longer-run rate of just 1.8% to 2.2%.

What about the labor market?

While the unemployment rate is currently at its longer-run level (and is forecast to be at or below 5% from 2016 through 2018), Chairwoman Yellen reiterated her view that the jobless rate may be understating the degree of slack in the labor market.

Any surprises?

One Committee member sought additional stimulus via a negative interest rate by year-end; 4 of the 17 participants do not expect a rate hike at all in 2015, up from just 2 participants in June. Despite a lone voter who sought a rate hike of 25 bps, Thursday’s announcement seemed free of any urgency on the policy front.

Table 1. Economic Projections of Federal Reserve Board Members and Presidents, September 2015

Note: Excludes the three highest and three lowest projections for each variable in each year (except average and median Fed Funds rate figures, which include all participants.) Bolded figures are September 2015 forecasts (versus June 2015).

Arrows (↑,↓ and ≈ ) indicate direction of change in forecast from June 2015 to September 2015.

Real GDP and inflation projections are from Q4 of the previous year to Q4 of the year indicated. PCE inflation refers to the price index for personal consumption expenditures. Projections for the unemployment rate are for the average rate during Q4 of the year indicated.