The Federal Reserve on Wednesday held interest rates steady and signaled little appetite to adjust them any time soon, taking heart in continued job gains and economic growth and the likelihood that weak inflation will edge higher.
“We think our policy stance is appropriate at the moment; we don’t see a strong case for moving it in either direction,” Fed Chairman Jerome Powell said in a press conference following the end of the central bank’s latest two-day policy meeting.
Overall, he said, “I see us on a good path for this year.”
Fed policymakers said ongoing economic growth, a strong labor market and an eventual rise in inflation were still “the most likely outcomes” as the U.S. expansion nears its 10-year mark.
“The labor market remains strong … economic activity rose at a solid rate” in recent weeks, the Fed said in a policy statement a day after President Donald Trump called on it to cut rates by a full percentage point and take other steps to stimulate the economy.
The Fed also trimmed the amount of interest it pays banks on excess reserves to 2.35 percent from 2.40 percent in an effort to ensure that its key overnight lending rate, the federal funds rate, remains within the current target band.
The chief concern flagged in the policy statement was the currently “muted” level of inflation, which continues to fall short of the Fed’s 2 percent target. The statement suggested that a recent decline in inflation may be more persistent than expected, and was no longer to be blamed simply on falling energy prices.
The most recent data showed a measure of underlying inflation running at 1.6 percent, which would be a problem if it meant that households and businesses had doubts about the economy’s strength and were less willing to spend and invest.
Powell told reporters the decline in so-called core inflation was likely mostly due to transient factors, and he predicted it would rise back to the 2 percent target.
“If we did see inflation running persistently below (the target), that is something that we would be concerned about and something that we would take into account in setting policy,” he said.
But for now, the Fed chief said, low inflation allows the central bank to be “patient” in deciding on any further changes to its overnight benchmark lending rate, which it left in a range of 2.25 percent to 2.50 percent.
‘Making the Case’
Powell’s insistence that the weakness in inflation was likely transient and his repeated assertion that incoming data could take the Fed in either direction on rates helped quash a rally in stocks and U.S. Treasury securities after the policy statement.
By the end of his press conference, the S&P 500 index was about 0.3 percent lower on the day and Treasury yields, which move in the opposite direction of their prices, had risen to the day’s high. Interest rate futures also reversed direction, signaling a lower degree of confidence that the next Fed move would be a rate cut.
“He is making the case that a rate increase is possible, not a foregone conclusion it’s a cut only,” said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago.
The Fed raised rates four times in 2018 and, as late as December, had anticipated further rises in borrowing costs this year. Early this year it halted its tightening campaign on concerns about weak data in the United States and abroad.
The federal funds rate is the amount banks charge each other for overnight loans, and is the rate the Fed targets as its main way of controlling other borrowing costs in the economy. It neared the upper end of the target range last week, prompting the change in the interest paid on excess reserves.
Wednesday’s policy decision was unanimous, a sign that the Fed remains steady in its pledge to keep interest rates unchanged until incoming economic data provide a compelling reason to do otherwise.