The Federal Reserve published its first 2016 Semiannual Monetary Policy Report February 10, 2016. The FED previously stated, in the December 2015 Federal Open Market Committee report that they are satisfied with the continued level of economic growth and data. They plan to implement future rate increases through 2016 as scheduled.
Labor market conditions improved into the first month of 2016. Payroll employment has continued at the pace of 225,000 per month, though in January it dropped to 151,000 (Wall Street Journal). This slowing in the creation of jobs has not ended the continued decrease in unemployment. Unemployment has continued to decrease from a peak high in 2009 at 10% to 5.3% in June of 2015 dropping to 4.9% in January 2016 (FED, 2016).
Signs indicate that the December interest rate increase has not created negative consumer expectations. The FOMC report published in December reported that consumer spending increased following the FED’s interest rate increase. This is an indication that the FED’s interest rate increase had a positive effect on consumer expectations. The decrease in job creation indicates expectations of slowing in the economy in business. The net is job creation that continues to reduce the unemployment rate and an aggregate economy that continues to grow at a rate strong enough for the FED to proceed with planned interest rate increases in 2016. The 4.9% unemployment rate meets the minimum acceptable normal rate but is not at the maximum employment rate (FED, 2016). The labor force participation and part-time employment rates remain off target.
Inflation remains below the 2% target and is the primary concern that could cause the FED to suspend or cancel interest rate increases in 2016. The drop in energy price is the primary factor in slowed inflation. The primary cause has been attributed to increased domestic drilling (WSJ, 2016). Slow and decreasing global growth have been the primary concerns of the FED’s monetary policy and reaching objectives. Many domestic and foreign producers are reducing production.
Real GDP growth has maintained 1 ¼% growth (FED, 2016). This is strong growth even though it is not the target 2%. Preceding the FED’s interest rate increase inflation was above 2% but dropped slightly before the official implementation of the increase. Increasing interest rates is intended to slow growth, supporting real growth rather than over inflation.The report supports that 2015 was a year of strong growth that accurately indicated a time to raise interest rates. In addition, the semiannual monetary policy report states that private domestic demand increased and personal consumer expenditures rose ½% in 2015 (FED, 2016).
Treasury yields have decreased with the increase in interest rates (FED, 2016). This effects the rates on mortgages and loans. This can have a significant impact on the economy as the amount that institutions pay in interest increases they are receiving less interest from consumers. Most likely the decrease is to counter expectations because of the interest rate increase and will return to higher rates in the long-run. It is one indication of caution.
Liquid asset holdings at banks are at much higher levels than usual (FED, 2016). This is will be good news to analysts and politicians who suggest the solution to market risk and volatility is higher holdings rather than regulation. Lending to non-financial institutions is below average but the amount of risk in loans is higher. Financial institutions are retaining real dollars. The FED will continue to reinvest treasury yields as interest rates remain low.