FOMC Holds Rate at 0-0.25%, Announces Inflation Target, Releases Inaugural Fed Forecasts

The US Federal Open Market Committee (FOMC) kept the fed funds rate steady at 0 to 0.25 percent. The Fed said: "To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.  In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

The Fed previously announced the commencement of "operation twist" at its September meeting (and maintained that program, and the policy of reinvesting during today's meeting), after it held monetary policy settings unchanged at its August meeting, where it previously committed to low rates until 2013.  The US reported inflation of 3% in December, down from 3.9% in September, compared to 3.8% in August, and 3.6% in both July, June and May, up from 3.2% in April.  Meanwhile the US economy grew 1.8% in Q3, up from 1.3% in Q2, and 0.4% in Q1 this year.  

The FOMC also announced the adoption of an inflation target 2 percent, in a release the Fed said: "The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate."

Full text: http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm

In addition to the inflation target, the Fed also released its first set of forecasts ("economic projections and the target federal funds rate projections made by Federal Reserve Board members and Federal Reserve Bank presidents for the 24-25 meeting of the Committee").  The central tendency forecasts for the longer run real GDP growth was 2.3 to 2.6, and for the unemployment rate 5.2 to 6.0, and fore PCE inflation 2.0. In addition the FOMC participants generally clustered around 4.0 to 4.50 as the longer run federal funds rate.

Full text: http://www.federalreserve.gov/newsevents/press/monetary/20120125b.htm

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