Fed Holds Interest Rates Steady but Voices Confidence in Economy

A few pieces of disappointing economic news in recent weeks have not shaken the Federal Reserve’s confidence that the economy is in good health.

The Fed, as expected, did not raise rates on Wednesday after a two-day meeting of its policy-making committee. But it remains likely to raise rates in the coming months.

The Action

  • The Federal Reserve left its benchmark rate in a range from 0.75 percent to 1 percent.
  • Officials are not worried about the slow pace of growth during the first three months of the year. The Fed said the slowdown was “likely to be transitory,” meaning it expects a rebound.
  • The Fed remains on course to raise rates at least two more times this year. Investors expect an increase at the Fed’s next meeting, on June 13 and 14.

The Takeaway

The government estimates that the economy grew at an annual pace of just 0.7 percent in the first quarter, and prices continue to rise more slowly than Fed officials would prefer.

But the Fed, in a statement issued Wednesday after the meeting of its committee, said the economy’s engine was still looking good, even if the car was moving a little slowly.

Consumer spending, the bulk of economic activity, slowed in recent months, but the Fed’s statement said “the fundamentals underpinning the continued growth of consumption remain solid.”

So, too, for the broader economy. The Fed did not explain why it thought growth had slowed in the first quarter but said it continued to expect the economy would expand at a moderate pace.

The statement was backed by a unanimous vote of the Fed’s policy-making committee, the Federal Open Market Committee.

The Background

Internal debates have been subdued in recent months; most Fed officials are in broad agreement on the economic outlook and the proper course of monetary policy.

The Fed raised its benchmark interest rate in December and again in March. Many investors are anticipating another rate increase at the committee’s meeting in June.

The steady decline of unemployment is the primary reason the Fed is on the move. The unemployment rate fell to 4.5 percent in March, the lowest level since 2007. (The government is set to release the April jobs report on Friday.)


The U.S. Unemployment Rate

 

 

 

 

 

 

 

 

Most Fed officials have concluded that unemployment has returned to a normal level, and continued job growth will put upward pressure on inflation. But the Fed’s benchmark rate remains at a level that supports growth by encouraging borrowing and risk taking.

Accordingly, the Fed wants to raise interest rates by the end of the year to a level that does not encourage or discourage growth.

Fed officials have also discussed the details and timing of ending a related stimulus program, the Fed’s vast investments in Treasuries and mortgage-backed securities. The Fed has indicated it could begin to reduce those holdings by the end of the year.

There are, however, some reasons for hesitation. Despite the Fed’s fears of future inflation, actual inflation remains stubbornly sluggish. The Fed’s preferred gauge of price pressures, the Commerce Department’s index of personal consumption expenditures excluding food and energy, rose 1.6 percent over the 12 months ending in March. The Fed would like prices to rise at an annual pace of 2 percent.

The Fed is less concerned about the slow pace of economic growth in the first quarter, perhaps because there is evidence the government has systematically underestimated first-quarter growth in recent years. Growth over the last 12 months has remained around 2 percent, the mediocre but steady pace the economy has maintained in recent years.

Janet L. Yellen, the Fed’s chairwoman, said recently that the combination of rapid job growth and slow economic growth was “a big problem.” The slow growth appears to reflect the slow pace of improvement in the productivity of the average American worker.

That, however, is a problem the Fed cannot solve by holding down rates.

The Reaction

The Fed’s statement made little impression on financial markets. The Standard & Poor’s 500-stock index lost 0.13 percent on the day, closing at 2,388.13. The yield on the benchmark 10-year Treasury rose to 2.32 percent, from 2.29 percent. Investors also modestly increased their assessment of the chances that the Fed will raise rates in June — to 70 percent, from about 67 percent.

Michael Feroli, chief United States economist at JPMorgan Chase, noted the Fed’s steady optimism, saying: “The postmeeting statement acknowledged the recent disappointments in growth and inflation but chose to view those developments in a favorable light. This glass-half-full statement leaves the door wide open to a June hike, provided, of course, that the recent data letdowns are indeed transitory.”

Michael Gapen, chief United States economist at Barclays, said the Fed’s confidence in the face of disappointment was a recent shift.

“In the past, a soft patch in the data or a shift in market sentiment caused the Fed to alter course,” he said, adding, “The new Fed seems driven to lead and, at least for the moment, to be determined to follow its chosen path.”

Read the original article here.

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