FOMC MEET - ANOTHER $10 BILLION REDUCTION, NO HIKE IN INTEREST RATES

By Ruma Dubey

The fact that the Fed would not be making any decision today was very clear last week itself when Obama made his announcement on ISIS. He basically announced three things – he wanted the OK of Congress for $500 million to spend on arming and training Syrian rebels. He also said that USA was getting aggressive on air strikes in Syria and thirdly, USA would no longer recognize the border between Syria and Iraq. He was also looking at garnering support from allies like Saudi Arabia and European on board to counter ISIS' regional and international influence.

All this basically sent out the signals that USA was once again getting into a war zone; not exactly like Iraq but these actions of Obama meant that in months ahead we do not know how much more US will have to get involved. And that means, more money could be required and that itself had sent out a message then that the Fed would not do anything right now to topple its cart of apple, apart from going about the routine of reducing QE by another $10 billion.

So once more, the Fed seems to have got more comfortable in the shoes that it is wearing – the near 0% interest rate remains intact for six years now. Yellen also sent out the message that rates will be kept at the same levels for a ‘considerable’ time. This surely means through 2015 and we do not know yet whether it would be for 2016 too. The Fed said that the economy still had “significant underutilization of labor resources.” The bond buying program now stands at $15 billion per month and will be ending this next month. Thus the Fed sends out the message that its progressing on the path of QE exit as planned but when it comes to policy shift, it will be moving very slowly.

Yellne justified this continuation with the extraordinarily easy monetary policy on economic parameters. The labor market is yet to fully recover and till employment targets are not met, looks like Yellen will be in no hurry to change anything.

Highlights of the Fed statement:

• Bond buying reduced by another $10 billion to $15 billion per month.
• Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. This means bond buying will end in October.
• Labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources.
• Inflation has been running below the Committee’s longer-run objective of 2%. Longer-term inflation expectations have remained stable. Likelihood of inflation running persistently below 2% has diminished somewhat since early this year.
• In determining how long to maintain the current 0 to 0.25% target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2% inflation. 
• 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.
• “Considerable time” guidance is based on the Fed’s expectation of inflation running below its 2% target. 
• When raising rates, Fed will continue to maintain a target range for the federal funds rate (like the current 0 to 0.25%) instead of a single point.
• Pace of tightening to depend on economy.
• Yellen see’s reverse repo use ‘only to the extent necessary’.
• FOMC intends to hold no more assets than required.
• The primary tool for moving the federal funds rate will be interest on excess reserves, alongside its overnight repo facility. 

What will happen to Indian markets? Naturally, it will celebrate as this uncertainty of rate hike is gone, at least for a ‘considerable’ time. And in a couple days from now, the market will look forward to Rajan’s policy announcement.

For now, this FOMC meet is behind us but the big news which is likely to dominate everything else is the voting for Independence by Scotland. That is something we all should need to watch – if Scotland moves out of UK, there could be major geopolitical ramifications.