On Wednesday, Fed chair Janet Yellen hardly deviated from her March stance and left key policy rates unchanged at 0.25-0.50 per cent. “The stance of monetary policy remains accommodative, thereby supporting further improvement in labour market conditions and a return to 2 per cent inflation”, Fed said in its review. It added that it remained confident inflation would rise to its 2 per cent target over the medium term.
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The Fed repeated that it expects inflation to move toward its 2 percent target from persistently low levels as temporary factors, like sharply lower energy prices, fade.
In a 9-1 vote, the Federal Open Market Committee (FOMC) chose to wait until the Fed’s next meeting in June before making a decision on a rate hike. It said household spending had “moderated”, and business investment and export activity remained “soft”.
Other major central banks have been grappling with ways to deal with lackluster economies, including the adoption of negative interest rates.
If the Fed raises rates prematurely, however, it will have little room to correct the error by doing more. In its carefully calibrated statement, the Fed moderated previous expression of concern about global financial and economic developments. The yuan rose less than 0.1 per cent versus the greenback after China’s central bank boosted its daily reference rate by 0.6 per cent, the most since a dollar peg ended in July 2005. The committee reiterated that “a range of recent indicators, including strong job gains, points to additional strengthening of the labor market”.
Markets have turned up since the last rate decision in March.
The Federal Reserve’s policy-setting committee, at the conclusion of its two-day meeting on Wednesday opted to keep interest rates on hold another month.
Oil prices also have rallied from a near-collapse earlier this year and the USA dollar has shed some of its strength from last year. Out of the 10 voting members, nine voted for the motion while there was one dissent from Esther George, president of Federal Reserve Bank of Kansas city.
Fixed-income analysts said the weak data confirmed the market’s expectations that the Fed will not raise interest rates at its next meeting in June. The S&P 500 has risen more than 14 percent since mid-February. This is an important distinction – not only because employment is explicitly part of the Fed’s official dual mandate, but also because it bodes well for wage increases and inflation, the central bank’s second objective.
It’s been hard recently to make sense of the overall United States economy because of the conflicting signals from March’s data. Economists polled by Reuters predict 0.7 percent growth for the first quarter.
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Ahead of Wednesday, the Fed has forecast two rate hikes for the remainder of 2016.
