1. US Federal Reserve leaves key policy rate unchanged

US Federal Reserve leaves key policy rate unchanged

The Fed's pause comes after it modestly raised its benchmark short-term rate in December and March.

By: | Updated: May 4, 2017 1:51 AM
Federal Reserve, US Fed Rate, Fed Rates remained unchanged, U.S. economy, policy meeting notes, Great Recession, inflation The Fed’s pause comes after it modestly raised its benchmark short-term rate in December and March. (Source: Reuters)

The Federal Reserve has left interest rates unchanged while signaling that it expects a resilient U.S. economy and solid job market to justify further rate hikes later this year. The Fed’s pause comes after it modestly raised its benchmark short-term rate in December and March. Most economists expect it to do so again when it next meets in mid-June.

The statement the Fed issued Wednesday after its latest policy meeting notes that the economy slowed during the January-March quarter but says it expects that slowdown to be ”transitory.” Nearly eight years after the Great Recession ended, unemployment is at a low 4.5 percent. Key sectors of the economy appear sturdy. Still, consumer spending and factory output have slowed, and inflation remains below the Fed’s target rate.

The Fed remains in the midst of a campaign to gradually raise interest rates from ultra-lows. One reason for it to stand pat this week is that even though the job market has shown steady strength, the economy itself is still growing in fits and starts. On Friday, the government estimated that the economy, as gauged by the gross domestic product, grew at a tepid 0.7 percent annual rate in the January-March quarter. It was the poorest quarterly performance in three years.

You may also like to watch:

Though some temporary factors probably held back growth last quarter and might have overstated the weakness, the poor showing underscored that key pockets of the economy – consumer spending and manufacturing, for example – remain sluggish. On Monday, the government said consumer spending stalled in March for a second straight month. And the Institute for Supply Management reported a drop in factory activity.

Most economists have expressed optimism that the economy is strengthening in the current April-June quarter, fueled by job growth, higher consumer confidence and stock-market records. Many think that annualized growth could accelerate to around 3 percent and that the Fed will soon feel confident to resume raising rates. The global economic picture has also brightened somewhat.

It isn’t just the Fed’s short-term rate – a benchmark for other borrowing costs throughout the economy – that likely occupied attention at this week’s meeting. Officials probably also discussed how and when to start paring their extraordinary large $4.5 trillion portfolio of Treasurys and mortgage bonds. The Fed amassed its portfolio – commonly called its balance sheet – in the years after the financial crisis erupted in 2008, when it bought long-term bonds to help keep mortgage and other borrowing rates low and support a frail economy. At the time, the Fed had already cut its short-term rate to a record low.

The balance sheet is now about five times its size before the financial crisis hit. The Fed stopped buying new bonds in 2014 but has kept its balance sheet high by reinvesting the proceeds of maturing bonds. The Fed’s thinking has been that reducing the balance sheet could send long-term rates up and work against its goals of fortifying the economy.

Now, as the Fed becomes more watchful about inflation pressures, the time is nearing when it will need to shrink its balance sheet, a process that could have the effect of raising some borrowing rates, at least modestly. The Fed jolted investors when it released the minutes of its March meeting, which showed that most officials thought that process would be appropriate later this year. This was sooner than many investors expected.

The Fed didn’t clarify its timetable for paring its balance sheet in the statement it issued Wednesday. One reason might have been that this week’s meeting wasn’t accompanied by a news conference with Chair Janet Yellen to explain any shifts in the Fed’s policy or thinking. Yellen will hold a news conference after the Fed’s next meeting ends June 14.

Some Fed officials have suggested that they would prefer not to be raising the short-term rate at the same time that they are beginning to reduce their balance sheet. Giving investors too much to digest at once risks unsettling financial markets. In 2013, the Fed triggered a brief storm in bond markets when then-Chairman Ben Bernanke raised the possibility that the Fed would start tapering its bond purchases later that year, catching investors by surprise.

It’s also possible that the Fed chose not to reveal anything Wednesday about its timetable for reducing its balance sheet, in part because the policy committee has yet to reach a consensus on when or how to do so.

 

  1. No Comments.

Go to Top