WASHINGTON - In its semiannual monetary policy report to Congress, the Federal Reserve Board gave no new insight into its current policy stance, when it might raise rates again or when it would initiate a change to its reinvestment policy.
The Monetary Policy Report released Friday reiterated that the Federal Open Market Committee "currently expects that, provided the economy evolves broadly as anticipated, it would likely begin to implement the (reinvestment policy) program this year."
The committee also "affirmed that changing the target range for the federal funds rate remains its primary means of adjusting the stance of monetary policy," the report said, though it gave no new indication of when it might raise its policy rate from the current target range of 1.00% to 1.25%.
It said only that the FOMC "currently expects that the ongoing strength in the economy will warrant gradual increases in the federal funds rate," adding as it has in recent FOMC statements "that the federal funds rate will likely remain, for some time, below the levels that the Committee expects to prevail in the longer run."
The report is mostly a collection of previously public statements, including the June Summary of Economic Projection, the post-FOMC meeting statement, and Chair Janet Yellen's remarks during her press conference.
New hints on monetary policy could come when Yellen answers questions about the report before the House Financial Services Committee Wednesday morning. Her prepared opening statement will be released at 8:30 a.m. ET and the hearing begins at 10:00 a.m. ET. She will also testify Thursday to the Senate Committee on Banking, Housing, and Urban Affairs.
The report released Friday did note some financial stability concerns, though it said "vulnerability in the U.S. financial system remained, on balance, moderate."
It highlighted the fact that valuation pressures "have increased further across a range of assets, including Treasury securities, equities, corporate bonds, and commercial real estate."
It also noted "term premiums on Treasury securities continue to be in the lower part of their historical distribution," and warned "a sudden rise in term premiums to more normal levels poses a downside risk to long-maturity Treasury prices, which could in turn affect the prices of other assets." It did not elaborate on how the Fed would respond to such shifts.
One area the Fed Board addressed specifically is corporate bond liquidity. "A series of changes, including regulatory reforms, since the Global Financial Crisis have likely altered financial institutions incentives to provide liquidity, raising concerns about decreased liquidity in these markets, especially during periods of market stress."
The report noted though that "available evidence does not point to any substantial impairment in liquidity in major financial markets in recent years," adding that even in instances in which liquidity conditions appear to have deteriorated, "the effects have been mild and suggest limited economic consequences."
While testifying to Congress next week, Yellen will undoubtedly be asked about the use of monetary policy rules, a favorite topic among House Republicans. The report tries to head off some of the questions about the use of rules, saying FOMC policymakers "discussed prescriptions from monetary policy rules as long ago as 1995 and have consulted them routinely since 2004."
The materials FOMC policymakers see before each meeting "also include forecasts of how the federal funds rate and key macro indicators would evolve, under each of the rules, several years into the future," the report said.
But following the Fed's usually objection to adopting and applying a single monetary policy rule, such as the Taylor rule, the report goes on to say the U.S. economy "is highly complex, and these rules, by their very nature, do not capture that complexity."
For example, it said, "while the unemployment rate is an important measure of the state of the labor market, it often lags business cycle developments and does not provide a complete measure of slack or tightness."
The report points out that "while monetary policy rules often agree about the direction (up or down) in which policymakers should move the federal funds rate, they frequently disagree about the appropriate level of that rate."
