Following on from the last blog post regarding the FOMC meeting, the results have finally come out!
After the highly anticipated Federal Open Market Committee meeting on Thursday 17th September and Friday 18th September, the decision was made to leave short-term interest rates at rock bottom levels. This was done in order to get a better read on how the global economic turbulence and markets are affecting the overall outlook and for the first time ever, the FOMC rate announcement specified a date at which interest rates should/could be raised. The significant downward revision in the first quarter GDP and ongoing three year revisions gave an indication that recession was deeper than we believed prompting the Feds decision of leaving interest rates low as it suggested that the weakness in our economy is much more broad-based than originally thought.
Despite this, however, although interest rates are staying low for the moment, Fed officials say that a rate increase this year is still possible. Mr. Lockhart, who holds a voting role on the FOMC, believes that the Fed will raise rates this year as he trusts the economy is “performing solidly”. This is a major misconception as the announcement by the FOMC acknowledged that growth this year has been slower than expected. Mr. John Williams, another FOMC voter, agreed that a rate rise is appropriate. He believes that although holding off on borrowing costs for a while longer is better, the Fed’s should not wait indefinitely. This decision, however, was countered by 2 other policy makers as they believe the economy has improved enough for the Central Bank to begin moving toward a more historically normal policy stance now. Richmond Fed President Jeffrey Lacker stated that “it is time to recognise the substantial progress that has been achieved and align rates accordingly.” He completely dismissed fears that inflation is too low despite the fact that the Fed has missed hitting it 2% target for the past 3 years and has no expectation of reaching it until 2018.