The Federal Reserve’s monetary policymaking committee (the Federal Open Market Committee – FOMC) decided today to keep its target overnight interest rate (the “federal funds rate”) in a target range of 0% to 0.25%. 

Highlights of Today’s Policy Statement (available here):

Underlined text indicates noteworthy changes from the previous policy statement.

• Fed Funds Target Rate:  “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
• Economic Activity:  “Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.… Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.”
• Housing Sector:  “The housing sector continues to be depressed.”
• Households and Businesses: “Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls.”
• Inflation:  “Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate.”

• Future Fed Policy: “To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”
• “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”
• Members’ Voting Record: “Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”
• Next Fed Meeting:  The next scheduled FOMC meeting is January 25-26.

 

2011 Shift in Voting Members (not included in the Fed’s statement)

Beginning in January, Reserve Bank presidents Charles Evans of Chicago, Charles Plosser of Philadelphia, Richard Fisher of Dallas, and Narayana Kocherlakota of Minneapolis will gain voting positions currently held by Reserve Bank presidents Eric Rosengren of Boston, Thomas Hoenig of Kansas City, James Bullard of St. Louis, and Sandra Pianalto of Cleveland.  Among the current voting members, Hoenig has been the lone dissenter, but this could change in 2011.  Plosser and Fisher have not hesitated to dissent in the past, and Kocherlakota has questioned the efficacy of the Fed’s exceptionally low-rate policy (though he supported QE2).