FOMC Review: The Fed Disclosed Parameters For Making Rate Decisions And Stated It Would Stay Low For Long

The FOMC decided to leave the Fed funds rate unchanged at 0-0.25% and reiterated to keep it low for 'an extended period'. The Fed also listed conditions that warranted an unprecedentedly low level of interest rates: low rates of resource utilization, subdued inflation trends, and stable inflation expectations. In the meeting, policymakers also modestly upgraded its assessment of current conditions and reduced the amount of agency debt it purchased. These mildly positive factors partly offset the dovish tone of the post-meeting statement.

Concerning economic developments, the Fed's wordings were more 'bullish' than before. In the November statement, it's said that economic activity 'has continued to pick up' while in the previous meeting, the Fed merely used 'has picked up following its severe downturn'. Also, the statement said household spending appears to be 'expanding', which replaced the word 'stabilizing' in the prior statement. However, policymakers were more concern on the financial market by saying 'conditions in financial markets were roughly unchanged' while in September, they believed 'Conditions in financial markets have improved further'.

Probably premised on the improvements mentioned above, the Fed decided to scale back its purchase of agency from $200B to $175B. The Fed emphasized it's consistent with the recent path of purchases and reflects the limited availability of agency debt, rather than a move to exit from the expansionary policy.

The policy statement was largely inline with our and the market's expectations as most of the committee members voted to keep things unchanged. However, what's special in this statement is that the Fed specifically stated the 'economic conditions' that policymakers used to make monetary decisions. The conditions, 'low rates of resource utilization, subdued inflation trends, and stable inflation expectations' suggest that unemployment and inflation prospects are heavily weighed. Given the facts that unemployment rate is rising and Committee expects inflation will remain subdued for some time, it's almost certain that the Fed funds rate will keep its policy rate low for a long time.