Federal Reserve: Key rates unchanged; fewer hikes are expected

Posted

WASHINGTON >> The Federal Reserve is keeping a key interest rate unchanged in light of global pressures that risk slowing the U.S. economy.

As a result, Fed officials are forecasting that they will raise rates more gradually this year than they had envisioned in December. The officials now foresee two, rather than four, modest increases in the Fed's benchmark short-term rate during 2016.

The central bank said Wednesday that the economy has continued to expand at a moderate pace but that the global economy and financial markets still pose risks. Offsetting the threats, the Fed said in a statement after a policy meeting that it foresees a further strengthening in the already solid U.S. job market. It also sees an eventual pickup in inflation, which has remained below the Fed's target rate.

Since raising its key rate from a record low in December, the Fed has held off on raising rates again given market jitters and a sharp slowdown in China.

Still uncertain

Resuming its rate hikes too soon could slow growth or rattle investors again. This week, the government said that retail sales slipped in February and that Americans spent less in January than it had previously estimated. The report suggested that consumers remained cautious about spending despite a solid job market and lower gas prices.

The Fed's decision was approved 9-1, with Esther George, president of the Fed's Kansas City regional branch, dissenting. The statement said George favored a quarter-point rate hike now.

In its updated forecasts, which reflects the views of the Fed officials who take part in the policy meeting, the Fed revised its outlook to show two rate hikes this year. The forecast is based on responses from all 17 Fed officials who participate in the discussions — not just the 10 officials who vote at each meeting.

In a nod to the financial market turbulence that hit in the beginning of the year over concerns about falling oil prices and weakness in China, the Fed statement said, "Global economic and financial developments continue to pose risks."

It noted that "inflation picked up in recent months" but remained below the Fed's desired 2 percent target. It said prices were being kept low by the "transitory effects" of lower prices for energy prices and imports, which are cheaper because of a strong dollar.

The Fed has two mandates: To maximize employment and to keep prices stable. It has essentially met just one: In February, the United States added a robust 242,000 jobs — roughly the monthly average for the past six months. And the unemployment rate is a low 4.9 percent, close to the rate the Fed associates with full employment.

But inflation has been stuck below the Fed's 2 percent target rate for nearly four years. Too-low inflation tends to lead people to postpone purchases, which slows consumer spending, the economy's main fuel. Subpar inflation also makes the inflation-adjusted cost of loans expensive.


TALK TO US

If you'd like to leave a comment (or a tip or a question) about this story with the editors, please email us. We also welcome letters to the editor for publication; you can do that by filling out our letters form and submitting it to the newsroom.

Powered by Creative Circle Media Solutions