FED RESERVE MEET - AVOIDS SPOOKING THE MARKETS, MAINTAINS STATUS QUO

By Ruma Dubey

“Considerable time”  That was the mantra of the previous Federal Reserve meet headed by Janet Yellen and tonight it remained the same, adding one more word, “patient”.

Obviously, given the turbulent times, Yellen did not want to spook the markets and stuck to her previous tone. A quick look at the highlights of the Fed statement shows that these near zero interest rates, which have remained in US for the past 6 years is likely to continue for a much longer time.

Highlights of the Fed statement:

• Current 0 to ¼ % target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2% inflation.
• Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement.
• If incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
• The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
• Inflation estimated between 1% and 1.6% in 2015 v/s September’s forecast of 1.6% to 1.9% gain.
• In the longer run, the unemployment rate will be between 5.2% and 5.5% and at 5.2% and 5.3% by end of 2015. In other words, the Fed thinks this economy will be operating at full employment within the next year.

 No one expected a rate hike to be announced and all one wanted was some cue to what exactly had she meant when she had previously said Fed would wait for a ‘considerable time’ to raise interest rates after bond-buying ended. The meet came at a time when there is turmoil all around the world, except in Amercia, where things are slowly but surely turning better. So what we got today was the Fed not wanting to rock the boat, preferring to wait and watch. There was also wide spread worry about how the plunging oil prices, the trouble of the rouble in Russia and slowing global growth would impact USA’s economic projections and whether it would have an impact on the timing of the interest rate.  The worry on this front is that it is pushing down energy prices much lower and consequently the inflation than what the Fed wanted. Thus going ahead, keeping interest rates near zero while employment grows and economy does better with a falling inflation would be a very tough walk on thin ice.

The turbulent and extremely volatile Indian markets will take this news well when it opens for trading today. The Cabinet giving its nod to the much-awaited GST Bill will probably propel the market into the green. The Russian rouble free fall halted a bit after its Central Bank stated that it was planning new measures to stabilise the currency to try to stem its recent slump against the dollar. It said that if necessary, it would provide additional capital to Russia's banks and financial companies.

Looks like today’s day will dawn bright and green, unless of course some new dirt comes out from under the carpet!

For a detailed read into the Fed statement, go to: http://www.federalreserve.gov/newsevents/press/monetary/20141217a.htm