U.S. Fed Says Low Level Funds Rate Likely to be Warranted "Through Late 2014"

• Fed holds Fed funds target in 0 to 0.25% range and says that the low funds rate is likely warranted until "at least through late 2014."
• Modest economic growth remains the baseline view of policymakers.
• Summary of Economic Projections to be released at 2:00pm.
• FOMC members to provide projections of timing of initial rate increase and the appropriate path of Fed funds target over upcoming years.
• Aim of policy is to provide decision makers with a more refined expected trajectory for interest rates as they assess their investment and/or spending plans.

The Federal Open Market Committee (FOMC) press release covered the same ground as in mid-December 2011 with the US economy expanding moderately while the global economy shows signs of a slower activity. The Fed reiterated that "significant downside risks" continue to reflect the persistent volatility in global financial markets. The policy prescription was maintained with the funds target held at 0% to 0.25%, the extension of the average duration of the Fed's holdings and reinvestment of proceeds into agency mortgage-backed securities (MBS) were also left in place. The Fed affirmed that it continues to review the effectiveness of these policies and is prepared to adjust them if deemed warranted by the Committee. Importantly, today's statement says that in order to achieve its mandate, the very low level of the policy rate may be warranted until "at least through late 2014", extending meaningfully its previous timeline of "at least through mid-2013". To that end, the Committee "expects to maintain a highly accommodative stance for monetary policy" the release says.

There was general consensus to this policy statement with the exception of Jeffrey Lacker who did not want to include the time period descriptor in the policy outlook statement.

As is common practice, the Fed will release its Economic Projections of growth, inflation, and unemployment at the Chairman's press conference at 2:00 pm this afternoon. While today's press release did not make mention of the release of a new communication tool aimed at providing decision makers with a clearer read on the outlook for interest rates, a notice on the Fed's website on January 20, 2012 indicated that members' projections of the timing of the first interest rate increase as well as forecasts for the Fed funds target at the end of the 2012, 2013, 2014, and the longer-term will be presented. This change in its communications policy will act as a more comprehensive guide for markets regarding the path of monetary policy. At the Chairman's press conference, market makers will be looking for insight into how the FOMC will approach the different paths deemed appropriate for the Fed funds rate by the Committee members. Recent commentary suggests that there will be a significant divergence in the projections presented.

Our view is that recent economic data suggest that the US economy has been able to raise its game with solid employment gains recorded in December 2011 and the fall in claims pointing to another increase in January (albeit slower than December's 200,000 rise). Recent reports also point to the economy having grown at a 3.0% annualized pace in the fourth quarter of 2011 with early prints on regional Purchasing Managers Indexes (PMI) showing that the momentum continued into the first quarter of 2012. These encouraging signs, however, are facing off with persistent uncertainty regarding the resolution to the European sovereign-debt crisis and have fed into some forecasts for global growth being downgraded. Yesterday, the International Monetary Fund (IMF) announced a 0.7 percentage point cut to its world growth forecast in 2012 and a 0.6 percentage point cut to 2013. Until there is a clearer path for the global economy and proof that the US economy is able to grow fast enough to exert significant downward pressure on the unemployment rate, the Fed's policy will remain extraordinarily stimulative. Today's projections will provide some guidance as to when policymakers expect to make the first move to reduce monetary policy support.