The U.S. Federal Reserve left
interest rates unchanged on Wednesday but signaled it still expects one more
increase by the end of the year despite a recent bout of weak inflation.
New economic projections released
after the Fed’s two-day policy meeting showed 11 of 16 officials see the
“appropriate” level for the federal funds rate, the central bank’s benchmark
interest rate, to be in a range between 1.25 percent and 1.50 percent by the
end of 2017.
That is one-quarter of a point
above the current level.
Financial markets barely moved
after the release of the statement and projections. There also was little
reaction to the Fed’s announcement that it would begin decreasing its balance
sheet next month, perhaps confirming its hope that the portfolio runoff would
be as exciting as “watching paint dry.”
“The Fed did a good job
telegraphing what they were going to do and then they followed through with it,
so I‘m not sure the market (had) all that much of a reaction to it,” said
Michael Arone, chief investment strategist with State Street Global Advisors in
Boston.
In its policy statement, the Fed
cited strength in the job market, growth in business investment and an economic
expansion that has been moderate but durable this year. It added that the
near-term risks to the economic outlook remained “roughly balanced” but said it
was “closely” watching inflation.
Fed Chair Janet Yellen said in a
press conference after the end of the meeting that the fall in inflation this
year remained a mystery, adding that the central bank was ready to change the
interest rate outlook if needed.
“What we need to figure out is
whether the factors that have lowered inflation are likely to prove
persistent,” she said. If they do, “it would require an alteration of monetary
policy,” Yellen said.
While the interest rate outlook
for next year remained largely unchanged in the Fed’s latest projections, with
three hikes envisioned in 2018, the U.S. central bank did slow the pace of
anticipated monetary tightening from there.
It forecasts only two increases
in 2019 and one in 2020. It also lowered again its estimated long-term
“neutral” interest rate from 3.0 percent to 2.75 percent, reflecting concerns
about overall economic vitality.
The Fed, as expected, also said
it would begin in October to reduce its approximately $4.2 trillion in holdings
of U.S. Treasury bonds and mortgage-backed securities by initially cutting up
to $10 billion each month from the amount of maturing securities it reinvests.
Federal Reserve Chairman Janet
Yellen speaks during a news conference after a two-day Federal Open Markets
Committee (FOMC) policy meeting, in Washington, U.S., September 20, 2017.
REUTERS/Joshua Roberts
That action will start a gradual
reversal of the three rounds of quantitative easing the Fed pursued between
2008 and 2014 to stimulate the economy after the 2007-2009 financial crisis and
recession.
The limit on reinvestment is
scheduled to increase by $10 billion every three months to a maximum of $50
billion per month until the central bank’s overall balance sheet falls by
perhaps $1 trillion or more in the coming years.
Yellen said it would take a “a
material deterioration” in the economy’s performance for the Fed to reverse a
schedule she expects to proceed “gradually and predictably.”
The U.S. dollar rose against a
basket of currencies after the release of the Fed’s policy statement. U.S.
stocks extended losses while yields on U.S. Treasuries rose slightly.
BALANCING ACT
The policy statement and
accompanying projections showed the Fed still in the middle of a balancing act
between an economic recovery that has kept U.S. unemployment low and is gaining
steam globally and a recent worrying drop in U.S. inflation.
Three of the hawkish policymakers
appeared to move their expected policy rate down to account for only one more
hike by the end of 2017, leaving a core 11 clustered around a likely December
increase. The Fed has raised rates twice this year.
The Fed noted that the recent
hurricanes in the United States would affect economic activity but are
“unlikely to materially alter the course of the national economy over the
medium term.”
Forecasts for economic growth and
unemployment into 2018 and beyond were largely unchanged. Gross domestic
product is now expected to grow at a rate of 2.4 percent this year, 2.1 percent
next year and 2.0 percent in 2019.
The unemployment rate is forecast
to remain at 4.3 percent this year before falling to 4.1 percent next year and
remaining there in 2019.
Inflation is expected to remain
under the Fed’s 2 percent target through 2018 before hitting it in 2019.
There were no dissents in the
Fed’s policy decision.