By Thomas G. Wolfe, J.D.
Based on information it has received since it last met in November, the Federal Open Market Committee has unanimously decided to raise the target range for the federal funds rate to a .50- to .75-percent range, a .25 percent increase in the target range previously set a year ago. Similarly, the Federal Reserve Board unanimously voted to approve a .25 percentage increase to the primary credit "discount" rate to establish a new 1.25 percent level, effective Dec. 15, 2016.
The FOMC stated that economic activity has been "expanding at a moderate pace since mid-year" and that inflation has "increased" since earlier this year. According to the FOMC, near-term risks to the economic outlook appear "roughly balanced," and the "the labor market has continued to strengthen." Still, the Committee expects inflation to "rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further."
Economic outlook. The FOMC reported that the unemployment rate "has declined" and job gains "have been solid." In addition, household spending has been "rising moderately" while business fixed investment has "remained soft."
The FOMC further observed that while inflation increased, it still is "below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports." Further, while market-based measures of inflation compensation "have moved up considerably" but "are still low," most survey-based measures of longer-term inflation expectations "are little changed, on balance, in recent months." The Committee will continue to closely monitor inflation indicators as well as global economic and financial developments.
In communicating its economic outlook, the FOMC released charts and graphs depicting its economic projections.
Asset purchases. The FOMC stated that it is "maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction." Moreover, the FOMC anticipates continuing this policy "until normalization of the level of the federal funds rate is well under way." In the FOMC’s view, by keeping the Committee's holdings of longer-term securities at sizable levels, the policy "should help maintain accommodative financial conditions."
Federal funds rate. In view of realized and expected labor market conditions and inflation, the FOMC decided to raise the target range for the federal funds rate to a .50- to .75-percent range. In connection with future determinations of the timing and size of an adjustment, the Committee "will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation." According to the FOMC, this assessment "will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
Primary credit rate. As reflected in its Dec. 14, 2016, "Decisions Regarding Monetary Policy Implementation," the Fed raised the primary credit "discount" rate, which is the interest rate charged for short-term credit extensions to depository institutions. The discount rate was increased to the 1.25 percent level, effective Dec. 15, 2016. In taking this action, the Fed approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.
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