The September meeting of the Federal Open Market Committee (FOMC) concluded with the release of the traditional summary statement, Chairwoman Yellen’s press conference, and the economic projections of the meeting participants. The Fed also released a brief update to its June 2011 plans for normalizing monetary policy.
There was little changed in the language of the statement. The economy is expanding at a moderate pace, labor market conditions are improving but with the unemployment rate little changed since the last meeting and remaining underutilization of labor resources. The statement included an explicit reference to asset purchases ending after the October meeting absent any change in the path of labor market and inflation improvements.
The economic projections extended the outlook to 2017, and included a modest downgrade to GDP growth, mainly in 2015, but slight improvements to the unemployment rate and inflation forecasts. Polling meeting participants on the appropriate path of the federal funds rate revealed near unanimity on the first increase coming in 2015 (14 of 17 participants), and slight increases (25 basis points) in where the funds rate should be at the end of 2015 and 2016. The median of participants’ views was a federal funds rate between 1.25% and 1.50% at the end of 2015, and between 2.75% and 3.00% at the end of 2016. The median of participants’ views was that the funds rate should be 3.75%, its appropriate level over the longer run, by the end of 2017.
The update to the key elements of the normalization process for monetary policy included the principles that the federal funds rate would continue to be the main tool of monetary policy, using the interest rate paid on excess reserves and overnight reverse repurchase agreements to help achieve the target; after implementing increases in the federal funds rate the balance sheet would be reduce gradually by ending the practice of reinvesting principal repayments rather than selling securities, ultimately holding no more than necessary for the efficient conduct of monetary policy. All of these actions will be undertaken and adjusted taking into account evolving economic and financial conditions. Chairwoman Yellen responded to a question during her press conference that the reduction of the balance sheet may take until the end of the decade.
According to the information released today, the economic recovery and the committee’s plans for reducing monetary accommodation are moving right along.