The Fed’s policy-setting Federal Open Market Committee, as expected, left its target range on rates unchanged at 0.25-0.50 percent and removed a specific reference on the global economic risks in its policy statement. “Inflation has continued to run below the Committee’s 2 percent longer-fun objective”. The policy statement was adopted by a 9-1 vote, with Esther L. George, president of the Federal Reserve Bank of Kansas City, dissenting again.
Advertisement
“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 per cent inflation, ” the committee said.
In its statement, the FOMC noted that it “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”.
However, the USA central bank has tried to move away from forward guidance as it implements rate hikes. There is a good chance that one of those expected rate hikes might come in June. After a downward revision to February data, the index is 1.4% higher than the level it touched both a year ago and a month ago.
While at the same time it held back on its previous warnings about risks to USA growth from the world economy, the Fed insisted it would continue to monitor developments closely. It’s hard to believe there are huge pent-up price pressures in the US – wages have risen about 2.3% for the past 12 months, investment by businesses has been moderate because companies don’t need more production capacity to meet demand, and in fact, capacity utilization in manufacturing is still at a sluggish 75%.
In comments on the economy, there were remarks that the labour market had improved further with a range of indicators suggesting a further strengthening.
The Fed in December raised its benchmark short-term interest rate by a quarter point after keeping it near zero for seven years.
Some analysts still think the Fed may raise rates at its next meeting, in June, particularly if other economic indicators show the same strength as job growth.
“I do not see that the risks are so elevated, nor the outlook so pessimistic, as to justify the exceptionally shallow interest rate path now reflected in financial futures markets”, he said.
Since the Fed last met in mid-March, central bank policymakers have struggled to weigh the impact of opposing economic forces.
Prior to Wednesday’s announcement, more than 80 economists polled by Reuters said that they were expecting two rate increases this year, with the first hike coming as early as June.
Advertisement
If the Fed raises rates prematurely, however, it will have little room to correct the error by doing more.
