WASHINGTON (1/29/15)--Given the opposing forces of a strengthening job market and weakening inflation, the Federal Open Market Committee (FOMC) Wednesday made no substantial changes to forward guidance on when it will raise short-term interest rates from their near-zero levels.
Mimicking the refrain seen in its last policy statement, the FOMC said policy accommodation may be appropriate for "some time" once employment and inflation reach their mandate-consistent levels.
The Fed also reiterated that it will take a patient approach to making the decision on when to hike interest rates. Many expect the FOMC will not begin to raise rates until mid-2015, or later.
"The FOMC's decision to keep the federal funds rate at its current 0% to 0.25% target is not surprising given the low inflation rate, which is anticipated to decline further," said Perc Pineda, senior economist for the Credit Union National Association.
"One thing is definite: The decision of the Federal Reserve to keep the federal funds rate unchanged means that the squeeze on net-interest margin, which could be experienced by credit unions when short-term interest rates rise, is postponed for now," Pineda added.
While the FOMC did not mention the global economy, which has stagnated of late, much attention in the policy statement was paid to inflation and its recent struggles.
The Fed, which noted it continues to monitor inflation closely, expects inflation to continue to decline in the near term, but to rise gradually towards 2% in the medium term.
The FOMC sees the labor market, on the other hand, trending in the right direction, which could ultimately dictate when the Fed raises interest rates.
"This year is going to be another positive year for the U.S. economy, and at some point the federal funds rate will rise," Pineda said. "Since monetary policy has lags, it makes perfect sense to increase interest rates at some point sooner than later. The timing, however, depends on where inflation and unemployment rates are heading. So far, the Federal Reserve has done a good job keeping its fingers on the pulse of the U.S. economy."