The Federal Reserve is struggling to adapt to an economy that refuses to boom.
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The Fed raised rates in December for the first time in almost a decade and signalled there would be four increases this year. Also, housing has improved, while business fixed investment has been soft. Still gains were checked by global growth …
But economist Chris Low of FTN Financial was more skeptical. The Fed also slightly decreased its projection for economic growth in 2017.
The renewed sense of caution was evident in the Fed’s so-called dot plot that reflects where top officials expect interest rates to end up. Its expectations for an even slower pace of rate hikes than earlier envisioned were contained in updated economic forecasts it issued Wednesday.
The central bank’s decision to stick with its 2016 rate path, however, appeared shakier, with six of its 17 policymakers projecting just one increase this year, Reuters reported. Spot gold climbed 1.4 percent, close to a two-year high. Investors are betting that there’s only a 2% chance of a rate hike in June.
The central bank highlighted that there was a pick up in household spending and economic activity.
Coupled with a 2 per cent inflation rate, the Fed’s target, that would put the “real” federal funds rate at zero.
Stock investors initially had little reaction to the Fed’s statement. Treasury prices, which move inversely to yields, were on track to rise in most maturities for a seventh straight session.
The US Federal Reserve will keep rates on hold between 0.25 per cent and 0.5 per cent, a move widely expected by the market following last month’s disappointing jobs results.
Yellen did not rule out the possibility of a hike at the Fed’s next meeting in July, but stressed that policymakers want to see “sufficient momentum” before doing so. That view was encouraged by the minutes of its previous meeting in April.
“Committee continues to closely monitor inflation indicators and global economic and financial developments” in its process to foster maximum employment and price stability, said the Fed in a statement on Wednesday. Fed officials contend that they have long stressed that their rate policies are not on a pre-set course but rather are “data dependent”. Inflation has been very low in recent years and its slow pace is a key reason holding back the Fed from raising rates further. “Obviously how that turns out is something that will factor into future decisions”.
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Worries about the ongoing strength of the United States economy, the American labour market and worldwide events such as the Brexit vote in Britain next month saw the Fed make a significant switch in its policy stance. The post-meeting statement also took a more dovish tone, with some indication that the central bank may hike rates only once this year, instead of the two increases previously flagged.
