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Fed Holds Interest Rates Steady and Plans Slower Increases Fed Holds Interest Rates Steady and Plans Slower Increases
(about 4 hours later)
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. WASHINGTON — The Federal Reserve is struggling to adapt to an economy that refuses to boom.
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 said on Wednesday, after a two-day meeting of its policy-making committee, that it would not raise its benchmark interest rate, and that future increases were most likely to unfold at a slower pace.
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 seven-year period since the end of the Great Recession has become one of the longest economic expansions in American history and, at the same time, one of the most disappointing. The Fed, in a statement announcing its decision, noted what had become a typical mix of good news and bad.
“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. Economic output has increased while job growth has slowed, the Fed said. Consumers are spending more while companies are making fewer investments. Exports are rebounding, but Britain’s June 23 referendum on whether to leave the European Union could set off another round of disruptions.
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. “Recent economic indicators have been mixed, suggesting that our cautious approach to adjusting monetary policy remains appropriate,” the Fed chairwoman, Janet L. Yellen, told a news conference.
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 decision to wait was unanimous. Even Esther L. George, the president of the Federal Reserve Bank of Kansas City, who voted to raise rates at the Fed’s last few meetings, agreed this time that the moment was not ripe. “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.
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. Investors already are heavily discounting the chances of a rate increase at the Fed’s next meeting in July, or at the following meeting in September. Those chances, derived from asset prices, stood at 12 percent and 28 percent respectively on Wednesday, according to the Chicago Mercantile Exchange.
“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 dialed back their expectations for future rate increases. The Fed in December had predicted four rate increases this year. On Wednesday, the Fed released new projections showing that 15 of its 17 policy makers now expected no more than two increases this year, and six of those officials predicted just one.
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. Even more striking, the median prediction of Fed officials was that the central bank’s benchmark rate would rise to just 2.4 percent by the end of 2018, down from the March median of 3 percent. That suggests officials increasingly regard mediocre global economic growth as an enduring malaise.
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. The Fed also appears increasingly open to the view that a shift in basic economic dynamics, driven by factors like lower productivity growth and an aging population, is holding down interest rates. That means low rates are less stimulative than they would have been in earlier eras. “It means that long rates can remain low without causing the economy to overheat, and therefore the urgency of tightening is very substantially diminished,” said Andrew Levin, a Dartmouth College economist.
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. Markets are even more pessimistic than the Fed. The yield on the benchmark 10-year Treasury fell to 1.574 percent, the lowest level since 2012. That is part of a broader decline in global rates that, in recent days, also has sent the yield on 10-year German debt below zero for the first time.
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. Equity markets, which in recent years have often celebrated when central banks hold down rates, also declined modestly on Wednesday. The Standard & Poor’s 500-stock index fell 0.18 percent to close at 2,071.50.
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. Fed officials increasingly think the economy has exited its postcrisis period, according to economic projections the central bank published on Wednesday. The recovery, in other words, may not be complete, but it is over. Most officials predicted stable 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, the lowest level unemployment had reached since 2007, before the recession.
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. But economic growth has disappointed expectations, and the Fed’s benchmark rate remains in a range between 0.25 and 0.5 percent after a single rate increase last December.
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. As recently as late May, Ms. Yellen predicted the Fed would raise rates in “the coming months.” On Wednesday, she downgraded a summer move to “not impossible.”
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. Jon Faust, an economist at Johns Hopkins University and a former adviser to Ms. Yellen, said the Fed was standing still because the basic economic situation had been remarkably stable. For the last several years, the labor market has gradually improved while inflation has been sluggish.
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. “I suspect that the core policy developments have never been so static for so long,” Mr. Faust wrote.
Under those circumstances it makes perfect sense for the Fed to watch and wait.
Consumer spending has driven domestic economic growth, and Ms. Yellen said she expected the trend to continue on the back of job growth and rising wages. 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. And a Fed index that summarizes labor market conditions has fallen to the lowest level in seven years.
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.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.
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 emphasized again on Wednesday that Fed officials also saw significant risks in moving too quickly. Because interest rates already are low, the Fed has little room to ease conditions if growth falters. Officials say it will be easier to respond to faster inflation than to an economic downturn.
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. 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. Moreover, the decline in the Fed’s projection of long-term interest rates suggests that the Fed may have underestimated the impact of its actions in December.
But Ms. Yellen said on Wednesday that the Fed’s move in December amounted to a small adjustment in rates, and that she did not agree with critics that it had an outsize impact. “I really don’t think that a single rate increase in December has had much significance for the outlook,” she said.