As expected, the US Federal Reserve today kept the funds target unchanged at 5.25-5.5 percent, while offering little in the way of guidance as to when any rate cuts might start to happen. The Fed's view of the current state of the US economy is unchanged:
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
It is impossible to question any part of that summary. Indeed, the startling real growth rate reported for Q4 GDP makes "a solid pace" seem like an understatement. Job growth continues to surprise to the upside, and the latest CPI data seem to confirm that the last stretch of getting inflation back to the 2 percent target is likely to prove the toughest.
The uncertainty over inflation is clearly top of mind for the FOMC, which again reminds its audience that it "is strongly committed to returning inflation to its 2 percent objective". The press release also includes a direct response to the media and market speculation over a possible early start to the easing process: The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.
That statement at least suggests they are starting to think about rate reductions, but remain far from being able to give any firm guidance as to timing. Given the state of the economy, it is hard to see why they need to be in any rush to cut. The likeliest scenario continues to be one in which rates stay at the current level for the first half of this year, with the 75 basis points in reductions suggested by the most recent "dot plot" still in prospect by year-end.
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