Fed Stays Patient on Interest Rates but adds new language


interest ratesAs expected there was no change to the interest rates this evening. The Federal Reserve remained its pledge to be “patient” on interest rate hike and maintained bullish views on the US economy and labor market, however added about their worries on inflation but still expect it to rise towards their 2 per cent target eventually.

The FOMC statement started with positive views towards the US economy. The policy makers said that “economic activity has been expanding at a solid pace.  Labor market conditions have improved further, with strong job gains and a lower unemployment rate”. Once again the Fed did not miss the effect of the falling oil prices “recent declines in energy prices have boosted household purchasing power” and continued that housing sector recovery remains slow while business fixed investments advance.

The committee however added a new language about the inflation demonstrating their concern regarding the falling inflation rates. Meanwhile the statement acknowledges the effect of the falling energy prices on the inflation rate “Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.

The statement also marked a historic statistics by becoming the first unanimously decided statement since June 2014.

Fed is optimistic

The committee based their optimism on global robust economic growth.

  • The US GDP grew by 5% in Q3 2014
  • Unemployment dropped to 5.6%

Oil on the table

Although the fed is optimistic about the US economy, it is clear that they are not happy of the current economic structure where cheaper oil prices alter the inflation expectations but they are consumer confidence boosters.

Worry about

  • Falling inflation rates due to falling energy prices
  • Cooling global economic development

What to expect next

It was expected that the Fed was not going to have any rate hike or make drastic changes to their usual statement. The Fed Chairlady Janet Yellen commented during the December FOMC press conference that the Fed is in no rush to raise rates and they only would be considering it in a couple of meetings.

A couple falls into April; hence until the end of the Q1 2015 we should not expect the Fed to take any drastic action. Until then the market is likely to be driven by the expectations which will push the USD higher.

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