Federal Reserve Likely to Leave Key Interest Rate Unchanged

(The Washington Post) -
A security guard walks in front of an image of the Federal Reserve before the arrival of U.S. Federal Reserve Chair Janet Yellen to give a news conference following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington. (Kevin Lamarque/Reuters)
A security guard walks in front of an image of the Federal Reserve before the arrival of U.S. Federal Reserve Chair Janet Yellen to give a news conference following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington. (Kevin Lamarque/Reuters)

The Federal Reserve left its benchmark interest rate unchanged after meeting in Washington on Wednesday afternoon, and officials offered little new guidance for when they might be ready to raise it again.

The nation’s central bank provided no assessment of the risks to its outlook for the economy — the third time it has omitted what was once a standard analysis. Investors generally believe the Fed is more likely to raise its target rate when it sees risks as “balanced.” The lack of guidance could mean officials are trying to keep their options open when it meets again in June, but it may also reflect disagreement within the central bank over the threat posed by the broader slowdown in the global economy.

In a carefully worded statement released after its meeting, the Fed said only that it is continuing to “closely monitor inflation indicators and global economic and financial developments.” That represents an upgrade from March, when the central bank singled out international turmoil as a threat.

The central bank also gave a mixed view of the recovery in recent weeks. It noted that the job market has improved, along with household incomes and consumer confidence. But it acknowledged that economic growth has slowed, and consumer spending has moderated. The Fed pointed to strength in the housing sector but softness in business investment and exports.

“Frankly, the economy is still operating in second gear,” said Tim Hopper, chief economist at TIAA-CREF. “Because things are still somewhat slow, they’re not going to be able to raise rates.”

Kansas City Fed President Esther George dissented from the central bank’s decision, arguing in favor of a small increase in the target rate.

Wall Street seemed unsure how to interpret the Fed’s statement. The blue-chip Dow Jones Industrial Average and the broader Standard & Poor’s 500-stock index inched up immediately after the statement was released. But the tech-heavy Nasdaq remained down 0.7 percent.

The Fed’s most recent forecasts show most officials expect to raise rates twice this year, perhaps following their meetings in June and December. But investors — including Hopper — are skeptical: Ahead of Wednesday’s meeting, futures markets were betting the odds of a rate hike this summer were just one in four, and there was a 44 percent chance the next move won’t happen until the end of the year.

Several influential central bank officials have pushed back against the market’s pessimism. Chicago Fed President Charles Evans, one of the most vocal supporters of central bank stimulus, recently said he considers two rate hikes this year as “appropriate.” Boston Fed President Eric Rosengren argued earlier this month that the economy’s moderate pace of growth will continue.

“I do not see that the risks are so elevated, nor the outlook so pessimistic, as to justify the exceptionally shallow interest rate path currently reflected in financial futures markets,” he said.

The Fed took the momentous step of raising its target rate in December, seven years after slashing it to zero in an historic effort to prop up the nation’s economy during the darkest days of the 2008 financial crisis. Record low interest rates have helped fuel a rebound in the housing industry, a rally on Wall Street and a recovery in the job market. As the economy picked up steam last year, the central bank gingerly began to withdraw its support by increasing its target rate by one-quarter of one-percent.

But since then, the Fed has remained frozen in place as turmoil in the global economy threatened to drag down the recovery at home. In the first weeks of the year, financial markets swung wildly while the price of oil fell steeply. The International Monetary Fund recently lowered its forecast for global growth this year from 3.4 percent to 3.2 percent.

The Fed is also grappling with inflation that remains below its target of 2 percent. In its statement Wednesday, officials pointed to the steep drops in oil and commodity prices as the culprits. But it said it remained confident that inflation would eventually rise as those sectors stabilize and the job market continues to improve.

The Fed had pledged to move “gradually” after raising its target rate in December — an undefined term that became the focus of intense debate among analysts — but the gloomy global outlook has so far precluded a second hike. At their previous two meetings, Fed officials could not even agree on which direction the economy might be headed.

In a speech late last month, Fed Chair Janet Yellen cited “global developments” as a reason for caution. But she expressed hope that the recovery would weather the storm.

“I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty,” she said.