Dogma policy

13 March 2012 By Martin Hutchinson

The central bank said the impact of higher gas prices would be fleeting, justifying its pledge to keep rates low through 2014. But price rises are already above the Fed’s soft target. The intellectual contortions needed to maintain policy for 30 more months will get interesting.

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The U.S. Federal Open Market Committee on March 13 kept the fed funds target interest rate at zero to 0.25 percent and reiterated that economic conditions are likely to warrant keeping it at exceptionally low levels through late 2014.

It noted that the recent increases in oil and gasoline prices will push up inflation temporarily, but it anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

One FOMC member, Jeffrey Lacker, chairman of the Richmond Fed, voted against the decision, as he does not anticipate that economic conditions are likely to warrant exceptionally low fed funds target levels through late 2014.

The Fed also decided to continue the program started in September that involves buying $400 billion of Treasury securities with remaining lives of six to 30 years and selling an equal amount of Treasuries with remaining maturities of three years or less.

The U.S. consumer price index increased by 2.9 percent in the year to January; the core CPI for all items except food and energy increased 2.3 percent. The price index for personal consumption expenditures increased by 2.7 percent and the core PCE index increased by 1.8 percent in the year to the fourth quarter of 2011.

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