What can we infer from today’s Federal Open Market Committee decision?
Today’s Federal Open Market Committee (FOMC) decision corresponds to Fed’s previous statements about the current state of U.S. economy. First, data inputs on Capacity Utilization led timidly FOMC to insights on industry output gap. Second, the Beige Book clearly illuminated onto issues related to the economic geography of current economic conditions. Third, preliminary data on GDP 2015Q1 continued to be obviously a major concern. Finally, neither was employment at stake this time, nor inflation, nor household consumption. First, In spite of the Beige Book reveling regionally based concerns, they believe nothing can be fixed institutionally. The FOMC left unchanged interest rates for federal funds, which is the rate they use to influence market loan rates. Its statement of June 17th 2015 reads “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate”.
On one hand, Oil Prices favor certain policy pressures mostly coming from Texas; therefore, policy preference coming from related industries such as transportation and utilities. On the other hand, other type of monetary policy preferences are coming from the most recent levels of exchange rates of U.S. dollar vis-à-vis Euro dollar. Here though, the FOMC has a muscle through influencing the rate. However, doubts are cast given the uneven reality of foreign exchange rates. Thus, not modifying the interest rate –in absents of the lowering option- seems the only way for the FOMC to bolster U.S. exports thereby doing so to employment. These two economic aspects made up the current concerns of Fed’s officials. Nonetheless, neither of them could be effectively influenced under the dual mandate of the FOMC. They demonstrated today liquidity trap keeps restraining monetary policy options.
What seems to be clear after today’s FOMC statement is that although the U.S. Federal Reserve aims at closing the output gap by influencing the interest rate, the institution has no clear diagnostic on Capacity Utilization. Apparently, Fed’s officials know data on Capacity Utilization no longer unveil facts worth concluding on output gap. What FOMC probably learned on Capacity Utilization during the second week of June is that Industrial Capacity on Manufacturing is below its long term average only 1.6 percent. The Federal Reserve Index for Manufacturing Industrial Capacity is at 77 percent. Non-durable goods Industrial Utilization Capacity is just 1.5 percent below its long term average. The latter Index showed 79.1 percent. Mining Industry Capacity Index shows the sector is adjusting to oil price rapidly and registered 83.3 percent Utilization.
Finally, trying to predict what the FOMC would do regarding the interest rate seems to be more complicated task than just plugging in policy targets on the Taylor Rule equation. Actually, the Taylor Rule is nothing but a crystal bowl inasmuch as economists look at it in isolation of surrounding data and information. Indeed, they seem to seriously consider broader sources of data and make a judgement comprehensively.