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Fed Holds Interest Rates Steady and Plans Slower Increases Fed Holds Interest Rates Steady and Plans Slower Increases
(about 1 hour later)
WASHINGTON — The Federal Reserve did not raise its benchmark interest rate on Wednesday, acknowledging that economic growth has again been slower than it hoped and predicted. WASHINGTON — The Federal Reserve did not raise its benchmark interest rate on Wednesday, and the central bank said it expected to raise rates more slowly in coming years, an acknowledgment that economic growth had again disappointed its expectations.
The Fed, in materials it released after a two-day meeting of its policy-making committee, also said that it now expects to raise interest rates more slowly in coming years than it had previously predicted. The Fed is struggling to adapt its plans to the reality of an economy that refuses to boom. Seven years after the official end of the Great Recession, the economic news remains mediocre. The Fed, in a statement released after a two-day meeting of its policy committee, noted what had become a typical mix of good news and bad.
The Fed is struggling to adapt its plans to the reality of an economy that refuses to boom. Seven years after the official end of the recession, the news remains a mix of good and bad. Most recently, job growth has weakened even as broader measures of economic activity have picked up. Economic growth has picked up while job growth has declined, the Fed said. Consumers are spending more; companies are making fewer investments. Britain’s looming referendum this month on whether to leave the European Union has added still more uncertainty.
“The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up,” the Fed said in its statement. It noted that people are spending more on housing and other consumer goods even as corporations are reducing their investments. “Recent economic indicators have been mixed, suggesting that our cautious approach to adjusting monetary policy remains appropriate,” the Fed chairwoman, Janet L. Yellen, said at a news conference after the statement’s release.
Janet L. Yellen, the Fed’s chairwoman, indicated in a recent speech that the Fed would not raise rates until it gained greater confidence in the health of the economy. The Fed’s statement provided little indication of how soon that might come, but in a separate set of economic projections, most Fed officials predicted that the central bank would still raise rates twice this year. In this environment of tepid growth and weak inflation, Fed officials once again dialed back their expectations for future rate increases. The Fed entered the year predicting four rate increases this year. On Wednesday, the Fed released new projections that showed 15 of the 17 policy makers expected no more than two hikes this year, and six of those officials expected just a single rate hike.
The decision to wait was unanimous. Esther George, president of the Federal Reserve Bank of Kansas City, argued at earlier meetings this year that the Fed should raise rates, dissenting most recently at the Fed’s last meeting in April, but this time she agreed with her colleagues that the Fed should wait. The median prediction is now that the Fed’s benchmark rate will rise to just 2.4 percent by the end of 2018, down sharply from the March median of 3 percent.
The statement said the domestic economy was feeling less drag from the weakness of the global economy, noting that exports have strengthened. But Fed officials said before the meeting that they remained concerned about a relapse. And several have said they are particularly awaiting the outcome of the United Kingdom’s referendum on its continued membership in the European Union. The decision to wait was unanimous. Even Esther L. George, president of the Federal Reserve Bank of Kansas City, did not want to raise rates. She voted for a hike at the Fed’s last few meetings, but this time she agreed the moment was not ripe.
Fed officials increasingly think the economy has exited its postcrisis period, according to economic projections that the central bank published on Wednesday. The recovery, in other words, may be incomplete, but it is also over. Most officials predicted stable economic growth around 2 percent over the next few years, and they foresaw little additional decline in the unemployment rate, which fell to 4.7 percent in May. They expected inflation to reach the Fed’s desired 2 percent annual rate in 2018. “The labor market appears to have slowed down, and we need to assure ourselves that the underlying momentum in the economy has not diminished,” Ms. Yellen said.
In this environment of tepid growth and weak inflation, Fed officials once again reduced their expectations for future rate increases. Fifteen of the 17 officials now expect no more than two rate increases this year, up from 10 officials in March. And six of those 15 officials now expect just a single rate increase this year, up from one official in March. The median prediction is now that the Fed’s benchmark rate will reach just 2.4 percent by the end of 2018, down sharply from the March prediction of 3 percent. The Fed’s next meetings are in July and September. Investors already are heavily discounting the chances of a rate increase in July, and September’s chances also have fallen sharply. Those chances, derived from asset prices, stood at just 12 percent and 28 percent on Tuesday, according to the Chicago Mercantile Exchange.
The Fed’s post-meeting statement said the domestic economy was feeling less drag from the weakness of the global economy, noting that exports had strengthened. But Ms. Yellen said that the Fed continued to worry about a relapse. She said one factor in the Fed’s decision to leave rates unchanged was concern about the potential impact of Britain’s referendum on its continued membership in the European Union. A breakup could be economically disruptive, she said.
Fed officials increasingly think the economy has exited its post-crisis period, according to economic projections the central bank published on Wednesday. The recovery, in other words, may be incomplete, but it is also over.
Most officials predicted stable economic growth around 2 percent over the next few years, and they foresaw little if any additional decline in the unemployment rate, which fell to 4.7 percent in May. They expected inflation to reach the Fed’s desired 2 percent annual rate in 2018.
The Fed, which entered the year planning to raise rates four times, has scaled back those plans as economic growth has disappointed expectations. The Fed’s benchmark rate remains in a range between 0.25 percent and 0.5 percent.The Fed, which entered the year planning to raise rates four times, has scaled back those plans as economic growth has disappointed expectations. The Fed’s benchmark rate remains in a range between 0.25 percent and 0.5 percent.
The unemployment rate fell to 4.7 percent in May, the lowest level since 2007, and Fed officials have pointed to signs that wages are starting to rise more quickly. But the Fed has hesitated to move. Officials see little reason for urgency, because inflation continues to rise more slowly than the Fed’s 2 percent annual target. The 4.7 percent unemployment rate is the lowest level since 2007, and Fed officials have pointed to signs that wages are starting to rise more quickly. But the Fed has hesitated to move. Officials see little reason for urgency, because inflation continues to rise more slowly than the Fed’s 2 percent annual target.
They also see significant risks in moving too quickly. Because interest rates are already low, the Fed has little room to ease conditions if growth falters. Officials say it would be easier to respond to faster inflation than to an economic downturn. Officials also see significant risks in moving too quickly. Because interest rates are already low, the Fed has little room to ease conditions if growth falters. Officials say it would be easier to respond to faster inflation than to an economic downturn.
Consumer spending has driven domestic economic growth even as other nations spend less money on American goods. And Ms. Yellen said in a recent speech that she expected the trend to continue as job growth and rising wages put more money into the pockets of consumers. Consumer spending has driven domestic economic growth even as other nations have spent less on American goods. Ms. Yellen said she expected the trend to continue as job growth and rising wages put more money into the pockets of consumers.
But Fed officials were surprised by the slow pace of job growth in May, when the economy was estimated to have added just 38,000 jobs. A Fed index that summarizes labor market conditions has fallen to the lowest level in seven years.But Fed officials were surprised by the slow pace of job growth in May, when the economy was estimated to have added just 38,000 jobs. A Fed index that summarizes labor market conditions has fallen to the lowest level in seven years.
Fed officials also are awaiting the results of Britain’s June 23 referendum on continued membership in the European Union. Ms. Yellen said a vote to leave “could have significant economic consequences.” Officials also have expressed increased concern about inflation expectations, which play a significant role in determining future inflation. (Workers, for example, may seek larger raises if they expect prices to rise more quickly.) The University of Michigan’s consumer survey reported last week that consumers expected 2.3 percent annual inflation in five years, the lowest level in the survey’s history.
And officials have expressed increased concern about inflation expectations, which play a significant role in determining future inflation. (Workers, for example, may seek larger raises if they expect prices to rise more quickly.) The University of Michigan’s consumer survey reported last week that consumers expected 2.3 percent annual inflation in five years, the lowest level in the survey’s history. Some economists see evidence that the Fed itself is playing a role in the slowdown. The Fed raised rates in December for the first time since the financial crisis, and officials have made clear that they would like to keep raising rates.
Ms. Yellen said she disagreed with those critics. “I really don’t think that a single rate increase in December has had much significance for the outlook,” she said.