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  1. US Fed leaves key rate unchanged at a time of uncertainty

US Fed leaves key rate unchanged at a time of uncertainty

The Federal Reserve has left its key interest rate unchanged at a time of solid economic gains but also heightened uncertainty surrounding the new Trump administration.

By: | Washington | Published: February 2, 2017 1:27 AM
"I think that allowing the economy to run markedly and persistently "hot" would be risky and unwise," Yellen said at the Stanford Institute for Economic Policy Research.  (Reuters) Janet Yellen (Reuters)

The Federal Reserve has left its key interest rate unchanged at a time of solid economic gains but also heightened uncertainty surrounding the new Trump administration. The Fed said in a statement ending its latest policy meeting today that the job market has continued to strengthen, inflation has climbed closer to its 2 per cent target and economic activity remains steady. But it signaled that it wants more time to monitor the economy and that it still envisions a gradual pace of rate increases. It offered no hints about when it will resume raising rates.

Many economists think the Fed may put off further rate increases until more is known about President Donald Trump’s ambitious agenda, or whether his drive to cancel or rewrite trade deals will slow growth or unsettle investors.

The statement was not accompanied by updates to the Fed’s economic forecasts or by a news conference with Chair Janet Yellen, both of which occur four times a year.

Last month, the Fed modestly raised its benchmark short-term rate for the first time since December 2015, when it had raised it after keeping the rate at a record low near zero for seven years. The Fed had driven down its key rate to help rescue the banking system and energize the economy after the 2008 financial crisis and the Great Recession.

When it raised rates last month, the Fed indicated that it expected to do so three more times in 2017. Yet confusion and a lack of details over what exactly Trump’s stimulus program will look like, whether he will succeed in getting it through Congress and what impact it might have on the economy have muddied the outlook.

And while Trump’s tax and spending plans are raising hopes for faster growth, his combative approach to trade relationships with such countries as China and Mexico could slow the economy if US trading partners retaliate and collectively impede the flow of imports and exports.

Nariman Behravesh, chief economist at IHS Markit, predicts that the economy will grow a modest 2 per cent to 2.5 per cent this year, before accelerating next year to 2.6 per cent to 2.7 per cent on the assumption that Trump’s policy proposals will have begun to take full effect by then.

The outlook for both years would mark an improvement over the economy’s lackluster growth of 1.6 per cent in 2016, its weakest performance since 2011.

Even though economic growth, as measured by the gross domestic product, was underwhelming last year, the job market appears close to full health. Hiring was consistently solid in 2016, and the unemployment rate ended the year at 4.7 per cent, just below the 4.8 per cent level the Fed has identified as representing full employment.

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