Walter Whitehurst
FOMC Minutes: Low Inflation Rates Won’t Delay Rate Hikes
The minutes of the Fed’s Federal Open Market Committee (FOMC) indicate that Fed policymakers aren’t concerned about low inflation rates as an obstacle to raising the target federal funds rate.
The national inflation rate was 1.50 percent for the 13 months ending in October. The inflation rate as reported in the Consumer Price Index (CPI) dropped to 1.25 percent in November.
The Core Consumer Price Index, which excludes food and energy sectors, showed an inflation rate of 1.75 percent. The Fed has repeatedly cited a target of 2.00 percent inflation, but inflation rates have remained consistently lower.
Recent freefall in fuel prices is keeping inflation below the Fed’s target range, although long-term indicators for inflation remained stable.
Fed Says Economy Increasing at “Moderate Pace”
Committee members noted that economic conditions improved at a moderate pace during the fourth quarter and that labor conditions also showed additional improvement. Non-farm payroll reports expanded in October and November and exceeded third quarter growth rates.
The national unemployment rate edged down to 5.80 percent in October and held steady in November. FOMC members established a national unemployment rate of 6.50 percent as a target rate for removing accommodative measures such as its asset purchase program that concluded in October.
Labor force participation rose, while the number of those under-employed in part time jobs declined.
Private sector hiring and quits increased, although job openings remained elevated in November and maintained levels seen in September and October. Stronger labor markets typically support housing markets as more families can afford to buy homes when hiring and employment rates are stable.
Housing Markets Remain Slow; May Inspire Would-be Buyers
The FOMC minutes noted that committee members viewed housing markets as housing starts and building permits saw slight increases. Construction of single-family homes increased while multi-family construction decreased. Ongoing shortages of rentals are seen as a factor driving renters into the housing market.
Sales of new and existing homes rose “modestly” in October. Slowing home sales will likely drive prices down as inventories of available homes increase. Mortgage rates are expected to rise, but analysts don’t expect mortgage rates to rise much beyond five percent, which remains historically low.
In spite of low mortgage rates, the Fed characterized mortgage refinance activity as “subdued” and said tight mortgage credit conditions continue to inhibit mortgage approvals for all but those with “pristine” credit.
Surveys of economic and financial analysts indicated that the Fed may raise its target federal funds rate mid-year instead of initial projections for raising the rate in late 2015. The target federal funds rate is currently 0.00 to 0.25 percent.
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