ZIRP Ends Unanimously

The Federal Reserve ended its zero interest rate policy today with a unanimous vote by the FOMC to raise the federal funds rate.

From the Fed statement:“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”

In reference to their existing balance sheet, The Fed will continue to reinvest the principal payments from agency debt and agency mortgage-backed securities, and anticipates it will continue reinvestments until the federal funds rate is “well under way”.

During the press conference that followed, in an act of remarkable understatement, Chair Yellen stated: “This is not an unanticipated policy move”.

So no major surprises today — and no internal dissent inside the FOMC.

While affirming the awaited improvement in the labor market (“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term…”), the committee added language that might reasonably be interpreted as dovish on the forward rate path:

“In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”