The Federal Open Market Committee, in a move to help the U.S. economy recover from the Great Credit Crunch, sliced the federal funds rate to a range of 0.00% to 0.25%, following its Dec. 16, 2008, meeting.
Then, four years later, it re-iterated its commitment to a dual mandate of raising rates if the unemployment rate declined below 6.5% and the inflation rate hoovered around 2%. The FOMC has had a difficult time adhering to its 2012 guidelines, for if it had the U.S. would have likely seen rates rise 11 times since June 2014.
Here's what the FOMC envisioned in its Dec. 12, 2012, Fed statement:
"The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
However, the unemployment rate did cross that threshold in April 2014, falling to 6.2% from 6.6%. But the Fed statement that followed in its April 29-30, 2014, FOMC meeting instead delayed a rate hike indefinitely. The FOMC lacked the courage to raise rates and the statement lacked transparency:
"In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored."
Since then, it has been a guessing game meeting to meeting. This uncertainty hurt the U.S. economy, particularly on Main Street where consumers looking to save money continued to seek higher rates.
If the commitment to raise rates when the unemployment rate fell below 6.5% was in place, the rate would have been raised 11 times since June 18, 2014. And the federal funds rate, today, would be at a range of 2.75% to 3% since Sept. 16, 2015.
Here's a table that shows the 11 rate hikes that could have been made:
At the Sept. 16-17 FOMC meeting this year, the Fed statement could have concluded that a 3% federal funds rate ended the first phase of normalization and it was time to wait and see how the moves were absorbed in the economy. In addition, this could have made the Federal Reserve a non-factor for the 2016 election.
But the committee added a new "mandate" following its Sept. 16-17 meeting, citing concern about weak economic growth in emerging markets and China. In the following month, the FOMC's Fed statement from its Oct. 27-28 meeting could have justified its first rate hike.
However, this new "mandate" is not going to end anytime soon and, thus, the FOMC may not be able to raise rates in December.
Fed Chief Janet Yellen recently stated during Congressional testimony the desire to raise rates if the current economic data is appropriate. The president of the New York Federal Reserve, Bill Dudley agrees. Of course, it all depends upon the outlook for economic activity and the labor market, and global economic and financial developments.
Let's look at the rate of inflation. Here's a graph Fed Chair Yellen referred to in a recent speech.
The chart clearly shows that the core Personal Consumption Expenditures (PCE) Index has been in a desirable range since the new millennium began. The FOMC should have stated all along that inflation continues to be under control within the 0% to 2% range.
But the FOMC has been ignoring the rising cost of living on Main Street, USA. Home prices are up 82% since 2000, while household incomes have declined by 7.2%. Savers earn next to 0% on bank CD's and money market funds and this source of income is a driver of consumer spending.
It appears we are stuck with a 0% to 0.25% federal funds rate as far as the eye can see, while the FOMC ignores the heart of America. Let's hope that the FOMC at least stops re-investing the proceeds of maturing securities from quantitative easing. Perhaps, this huge portfolio can eliminated in thirty years, taking pressure off future economic growth.
The FOMC could have stopped reinvesting the proceeds of maturing securities following its Oct. 28-29, 2014, FMOC meeting. Instead, they have repeated stated:
"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions."
This attitude prevails, despite the inflation rate today being still below 2%, the unemployment rate is 5% and the unemployment rate has been below 6.5% since April 2014.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.