Question

Read the latest statement from the Federal Open Market Committee which is on the Fed’s website. What are they saying about current economic conditions and their response to them? Is their decision wise?

Answer 1

FOMC MONETARY POLICY

29, January 2020

Key Points

1. Federal Open Market Committee met in December indicates that the labour market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a moderate pace, business fixed investment and exports remain weak

2. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. (But core inflation is running around 2 % at 2.3% in December, whereas headline data is also at 2.3% in December)

3. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1.5 to 1.75% percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labour market conditions, and inflation returning to the Committee's symmetric 2 percent objective.

4. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

5. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

FUNDAMENTALS

1. The economy expanded 2.3% in Q4 of 2019 year on year basis, and continue to remain in expansionary stage.

2. Labour market continues to remains tight with healthy real wage growth at around 5% and lowest unemployment rate around 3.6% (January 2020)

3. In January, Manufacturing PMI still above 51 stage (employment is soft, new orders are soft and input price inflation increased) level and service PMI too at above 50 level and at expansionary stage (employment , new orders and input price inflation increased).

4. Trade balance of US is improving with new Phase 1 deal with china in January 2020 and higher tariffs on Chinese goods.

5. Inflation rate (core and Headline) are still around 2 % level, consistent with bank statutory mandate.

INTERBANK MARKET  

1. The interbank rate (3 Month T Bill) rate is flat at 1.58% reflecting no change in short term interest rates. (it reflects that fundamentals are still tight)

CONCLUSION

The bank is optimistic about the economy, as the labour market is still tight. Inflation data still around 2 % which the bank is little concerned due to the impact of global growth weakness and subdued commodity prices. The Committee Believes that the current stance of monetary policy at around 1.50 - 1.75% is appropriate to support sustained expansion of economic activity, strong labour market conditions, and inflation returning to the Committee's symmetric 2 percent objective.

However the risks and geopolitical tensions persist in the global markets with higher volatility in some financial markets. The bank continue to monitor the global developments and will decide appropriate path for the target range for federal fund rate.

As the economic conditions are still tight in US, the path followed by Fed to hold interest rate at 1.50 – 1.75% is appropriate.