July, 2014 FOMC statement
The U.S. Federal Reserve held its sixth Federal Open Market Committee (or FOMC) meeting of the year July 29–30. At its conclusion, on Wednesday, July 30, the Fed released the press statement for the meeting.
Fed nearer to achieving labor market, inflation goals
In general, the FOMC statement at the end of the July meeting implied that the Fed was more upbeat on achieving its twin targets of full employment in the labor market and inflation at around the 2% long-term level.
In this section, you’ll read about the FOMC’s take on the change in inflation and inflation expectations after the July meeting, compared to the stance disclosed after its previous meeting on June 18. The next section will analyze the change in labor market conditions, and what they imply for economic growth and investments.
As one of the Fed’s two Congress-mandated goals, meeting the long-term 2% inflation target is very important. The Fed repeatedly indicated that it wouldn’t consider the rate tightening cycle until both inflation and unemployment were mandate-consistent.
Inflation had been a concern for the Fed for many months prior to the July FOMC meeting because it was persistently short of the Fed’s target long-term 2% rate. These concerns were voiced at the end of June FOMC meeting.
“The Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, and it’s monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”
However, over the past couple of months, the Fed’s favored measure of inflation, the change in personal consumption expenditure (or PCE) has shown signs of edging upwards. The PCE increased from 1.1% in March to 1.6% and 1.8% in April and May, respectively.
Another popular inflation measure, the Consumer Price Index (or CPI) has been trending above 2% in May and June. The Producer’s Price Index (or PPI), which measures prices paid by manufacturers, also moved up to a 2% and 1.9% annualized rate in May and June, respectively.
The Fed acknowledges the prospect of higher inflation
The impact of these changes were reflected in the FOMC’s statement at the end of the July meeting. It said “The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2% has diminished somewhat.”
Why is it necessary to keep a close tab on inflation?
Fostering price stability is one of the Fed’s most important goals. Stable prices promote confidence in the debt markets, including Treasuries (UST), investment-grade bonds, and high-yield bonds (JNK), among others.
Inflation and inflation expectations also influence the operating environment for businesses—for example, companies in the S&P 500 Index (VOO), Wells Fargo (WFC), and Kohlberg, and Kravis & Roberts (KKR). Private equity firm, KKR would be particularly interested in the path of the Fed funds rate because it would impact its required rates of return on prospective investments.
A stable price environment also fosters business confidence in the economy. Firms are more prone to hire when they’re confident about the business environment. As a result, well anchored inflation expectations help fulfill the Fed’s second mandate of full employment.
In the next section, you’ll find an analysis of the changes in the FOMC’s assessment of labor market conditions. Please continue reading the next section.
© 2013 Market Realist, Inc.