In its statement today following the conclusion of its interest rate meeting, the FOMC upgraded its assessment of the economy slightly while maintaining that the recovery is fragile enough that the Fed needs to keep its interest rates at their low levels for an extended period of time.
The Fed said that economic activity “has continued to strengthen” and “that the labor market is beginning to improve.” That was better than the language used about the labor market in the previous meeting on March 16th when the Fed said that the labor market “is stabilizing.” Job growth is one of the key criteria the Fed is looking at in terns of changing its policy stance. The statement also said that household spending “has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”
The second main criteria is inflation which does not seem to be going anywhere. According to the statement, “with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.”
That puts the economy in a bit of sweet spot for the Fed. While the US is posting growth inflation pressures remain weak, giving the Fed the opportunity to keep rates at their low levels to continue to nurse the economy back to health. That situation is also beneficial to US equities which responded positively to the statement.
Now, we do have Kansas City Fed President Hoenig dissenting in the FOMC vote as he believes the Fed should drop its “extended period” language. He “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.”
