22 July 2018

Fed Holds Rates Steady, But Indicates Increase Will Continue

#
Share This Story

The Federal Reserve held short-term interest rates steady Wednesday and indicated it remains on track to raise them gradually, including at its June meeting, to keep the expanding economy on an even keel.

After years of aggressive, postcrisis interventions to heal labor markets and delayed rate rises to spur inflation, central-bank officials now have the economy largely where they want it.

Labor markets are strong. Wages are rising. And inflation has reached the central bank’s 2% target but with little evidence of a breakout.

“Mission accomplished, for now,” said Michael Feroli, chief U.S. economist at JPMorgan Chase, in a research note Wednesday.

The Fed, in a statement released after its two-day policy meeting, offered nothing to dispel market expectations that it would deliver its second rate increase of the year when it meets in June.

Stocks and bond yields edged lower after the meeting ended. The Dow Jones Industrial Average closed down 174.07 points, or 0.7%, to 23924.98 in a fourth straight session of losses. The WSJ Dollar Index, which had its best month in April since November 2016, edged up 0.3% Wednesday. The yield on the benchmark 10-year U.S. Treasury note inched down to 2.964% from 2.976% Tuesday.

Fed officials acknowledged the recent firming of inflation, which they had forecast for many months, but signaled no plans to pick up the pace of rate increases in response.

Consumer prices rose 2% in March from a year earlier, according to the Fed’s preferred gauge, after nearly a year in which inflation softened unexpectedly. Core prices, which exclude the volatile food and energy sectors, rose 1.9% in March, up from 1.6% in February.

When inflation firmed early last year, officials added language to the March 2017 policy statement describing the Fed’s 2% inflation goal as “symmetric,” a signal they won’t raise rates more aggressively if inflation rises a bit above that level.

On Wednesday, officials added a second reference to their “symmetric 2% objective” in the statement, together with other changes to reflect the recent rebound.

The changes suggest the Fed is saying, “We’re not going to overreact if inflation moves above 2%,” said Lewis Alexander, chief U.S. economist at Nomura Securities.

Fed officials see 2% inflation as consistent with an economy with healthy demand for goods and services. Projections released at their March meeting show all 15 participants expected annual core inflation of at least 2% by 2020, and more than half of them see it rising to at least 2.1% next year and staying there through 2020.

The recent rebound was widely expected because inflation declined in March 2017, caused by a price war between wireless phone carriers. The weak figure dropped out of the year-over-year comparison in the latest inflation reading, which was released Monday.

When officials met in March, they said such an increase “by itself, would not justify a change in the projected path for the federal-funds rate,” according to minutes of that meeting released last month.

Fed officials voted in March to raise their benchmark rate to a range between 1.5% and 1.75%. They voted unanimously Wednesday to leave it there.

Fed officials find themselves at a potential turning point this year. “After a period of high anxiety facing very real challenges, they’ve come a long way,” Mr. Alexander said. “It would be a mistake to suggest they are ever completely satisfied, but it does seem like the risks in some sense are less profound than the ones they faced in recent memory.”

The question looming over Wednesday’s meeting centered on how officials might raise rates over the coming years, which could potentially shift the central bank from spurring economic growth to restricting it.

The challenge for central bankers is to lift borrowing costs enough to prevent the economy from overheating, but not so much that it tips into recession.

“Raising rates too slowly would make it necessary for monetary policy to tighten abruptly down the road, which could jeopardize the economic expansion,” Fed Chairman Jerome Powell said in a speech last month. “But raising rates too quickly would increase the risk that inflation would remain persistently below our 2% objective.”

A related question for Mr. Powell and his colleagues is how the Fed would react if inflation rises above the 2% target, which has scarcely happened since the central bank formally adopted it in 2012. Officials haven’t indicated how much or how long inflation could go higher without triggering a stronger policy response.

In March, officials penciled in three rate rises this year, but the committee was relatively evenly divided between those who favored three and four additional increases. Most officials expected three increases next year.

Traders in futures markets after the Fed announcement placed a nearly 50% chance of three more rate increases this year and have fully priced in one of those increases at the June meeting, according to CME Group .

The statement showed little desire to send a strong message in either direction. “They have the market as close to their expectations as one could reasonably wish for,” said Mr. Feroli of JPMorgan.

While the economy has performed in line with officials’ forecasts so far this year, there is greater uncertainty because of recent changes to tax, federal spending and trade policies in Washington.

President Donald Trump signed into law $1.5 trillion in tax cuts at the end of last year, boosting most private forecasts of growth and employment for the coming two years. Congress and the White House also agreed to increase federal spending over the next two years.

Wall Street economists predict the measures will push unemployment down to levels not seen since the 1950s, and no one is quite sure what that would do to inflation or financial stability.

The unemployment rate in March held at 4.1%. The Labor Department will release its April employment report Friday.

It is probably too soon for officials to have reached firm conclusions about how the recent fiscal policy changes could boost growth and price pressures. But the upturn in inflation, which has occurred largely before any of the fiscal stimulus ripples through the economy, could add a new dimension to these discussions.

Trade policy is another wild card. Mr. Trump has threatened to impose tariffs and other penalties against major trading partners, with a particular focus on China, to narrow trade deficits.

Those imbalances could widen, however, because the tax cuts and government spending increases are likely to increase domestic demand, which typically boosts imports. Tariffs, by raising import prices, also can fuel more inflation.

Click here for the original article from The Wall Street Journal.

Join Our Online Community
Join the Better Way To Retire community and get access to applications, relevant research, groups and blogs. Let us help you Retire Better™
FamilyWealth Social News
Follow Us