Concerns raised about global economic pressure

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WASHINGTON — The Federal Reserve sounded a note of concern Wednesday about how global pressures could affect the U.S. economy, while keeping a key interest rate unchanged.

Six weeks after it raised rates from record lows, the Fed took stock of a more perilous international picture that could alter its plans for further raising rates. The statement it issued after its latest policy meeting signaled that the Fed could slow future rate hikes if financial market losses and global weakness don't abate.

The statement said the Fed is studying "global economic and financial developments and is assessing their implications for the labor market and inflation."

Since the Fed raised rates Dec. 16, stock markets have plunged, oil prices have skidded and China's leaders have struggled to manage a slowdown in the world's second-biggest economy.

The Fed's statement noted that U.S. economic growth has also slowed. Some economists say they now expect just two modest Fed rate increases during 2016, rather than the three or four they had foreseen when the year began.

"This is intended to lull us into lower expectations as to when the next move is going to come," said Patrick O'Keefe, director of economic research at the accounting and consulting firm CohnReznick.

No cooperation

The Fed's signal in December that it would raise rates four times this year "has become less plausible as we've gotten a little bit into the year," O'Keefe said. "Reality has refused to cooperate."

In a key change to the statement, the Fed dropped language it had used in December that it was "reasonably confident" that inflation would reach the Fed's 2 percent target over the next few years.

By dropping this language, the Fed appeared to signal concern that inflation has fallen further since December as a result of a further drop in oil prices and a stronger dollar. Chair Janet Yellen and other Fed officials have stressed the importance of higher inflation. A key inflation gauge has run below the 2 percent target for more than three years.

Investors initially had little reaction to the Fed's statement at 2 p.m. Eastern time. Bonds and the U.S. dollar were little changed, and stock indexes were modestly lower. Later in the afternoon, stocks fell more sharply.

The Fed's policymakers left their benchmark rate unchanged in a range of 0.25 percent to 0.5 percent. For seven years until December, they had kept that rate at record lows near zero.

Still, the changes the Fed made in describing economic conditions signaled that it may be prepared to slow its credit tightening until it sees more evidence that the markets and the economy are stabilizing.

The December statement had said the economy was expanding at a "moderate pace." The new statement notes that "economic growth slowed late last year."

The previous statement also described risks to the outlook as "balanced." That description was dropped Wednesday.


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