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Fed Says Economic Outlook Continues to Improve With Steady Gains in Economic Outlook, Fed Leaves Interest Rate Unchanged
(about 5 hours later)
WASHINGTON — The Federal Reserve said Wednesday that the nation’s slow-and-steady economic expansion has continued into the new year, with little sign of flagging or acceleration. WASHINGTON — The Federal Reserve is waiting for more information about the Trump administration’s economic plans, just like everyone else.
The Fed also said, as expected, that it was leaving its benchmark interest rate unchanged. After its first policy making meeting of the year, the Fed said on Wednesday that its economic outlook remained essentially unchanged since its previous meeting in December. The nation’s slow-and-steady economic expansion has continued, with little sign in the latest data that it is flagging or accelerating.
The arrival of the Trump administration has not changed the Fed’s economic outlook. The statement, issued after a two-day meeting of its policy-making committee, offered a similar assessment of economic conditions as after the Fed’s last meeting in December. And as expected, the Federal Open Market Committee, which makes monetary policy, left the Fed’s benchmark interest rate unchanged.
The latest economic data showed “the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace,” the statement from the Federal Open Market Committee said. “Job gains remained solid and the unemployment rate stayed near its recent low.” The question is what comes next.
The committee voted unanimously to leave the benchmark rate unchanged, the statement said. The Fed in December raised its benchmark rate to a range between 0.5 percent and 0.75 percent. Fed officials said in the weeks before the meeting Wednesday that their uncertainty about the outlook had increased. President Trump has proposed significant shifts in economic policy — including changes in taxation, regulation and trade — that could affect growth.
Fed officials said in the weeks before the meeting that their uncertainty about the economic outlook has increased. President Trump has proposed a number of significant shifts in economic policy — including changes in taxation, regulation and trade — that could affect economic growth. “The statement is written such that the F.O.M.C. will be able to adjust monetary policy as needed in response to the fiscal and trade policies of the administration,” said Michael Gapen, chief United States economist at Barclays.
But the impact of any such changes is likely to be gradual, and the only hint in the Fed’s latest statement was a mention of increased public optimism about the outlook for the American economy. At its December meeting, the Fed raised its benchmark interest rate for just the second time since the financial crisis. After the increase of a quarter point, the rate now ranges from 0.5 percent to 0.75 percent, still very low by historical standards. Low rates encourage borrowing and risk-taking, contributing to faster economic growth.
“Measures of consumer and business sentiment have improved of late,” the Fed said.
Fed officials expressed optimism about the economic outlook in the weeks leading up to the January policy meeting, the first of the year.
“All in all, things are looking good,” Patrick T. Harker, president of the Federal Reserve Bank of Philadelphia, said in mid-January. “We’re starting 2017 off on a good foot.”
At its previous meeting, in December, the Fed raised its benchmark interest rate for just the second time since the financial crisis. The rate now sits in a range of 0.5 percent to 0.75 percent, still very low by historical standards. Low rates encourage borrowing and risk-taking, contributing to faster economic growth.
By raising rates, the Fed is gradually reducing the force of that stimulus.By raising rates, the Fed is gradually reducing the force of that stimulus.
Fed officials predicted in December that they would raise the benchmark rate three times this year, although they noted the presidential election had increased the uncertainty around that forecast. Specifically, Fed officials have cautioned they are likely to raise interest rates more quickly if the Trump administration and congressional Republicans adopt fiscal policies, like tax cuts and an infrastructure spending surge, aimed at increasing economic growth. Fed officials predicted in December that they would raise the benchmark rate three times this year. But they have cautioned that changes in fiscal policy could alter those plans. If Mr. Trump and congressional Republicans seek to increase growth, for example by cutting taxes or spending a lot on infrastructure and the military, the Fed could raise rates more quickly.
But for now, the Fed is inclined to move slowly because more than seven years of tepid growth have not restored the economy to full health. If Mr. Trump’s policies weigh on growth, the Fed could move more slowly.
The unemployment rate stood at 4.7 percent in December, a level most Fed officials regard as close to normal. Other measures of the labor market, however, continue to show weakness. Wage growth remains tepid, and the share of working-age adults with jobs remains depressed. The only hint of those pressures in the Fed’s latest statement was a mention of increased public optimism about the outlook for the nation’s economy.
The Fed’s preferred measure of price inflation rose by 1.6 percent in 2016, the strongest performance in more than two years. But inflation remains below the Fed’s goal of a 2 percent annual pace — a goal that the Fed has not achieved since 2011. “Measures of consumer and business sentiment have improved of late,” it said.
Janet L. Yellen, the Fed’s chairwoman, will have a chance to elaborate on the central bank’s plans when she delivers a semiannual report on monetary policy to Senate and House committees on Feb. 14 and 15. Fed officials are watching fiscal policy makers closely because the Fed has concluded that the American economy is growing at something close to the maximum sustainable pace, meaning that, in the Fed’s view, faster growth would probably lead to higher inflation.
Changes in fiscal policy are most likely to have a gradual impact, however, so the tension between the Fed and fiscal policy makers may play out mostly in coming years.
“The committee is probably still in a wait-and-see mode as far as fiscal policy is concerned,” said Kevin Logan, chief United States economist at HSBC.
The Fed’s assessment of economic conditions remained upbeat. The latest data showed “the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace,” the statement said. “Job gains remained solid and the unemployment rate stayed near its recent low.”
Fed officials spoke in similarly optimistic tones in the weeks before the meeting.
“All in all, things are looking good,” Patrick T. Harker, president of the Federal Reserve Bank of Philadelphia, said in mid-January. “We’re starting 2017 off on a good foot.”
But seven years of tepid growth have not restored the economy to full health.
The unemployment rate stood at 4.7 percent in December, a level most Fed officials regard as nearly normal. Other labor market measures, however, remain weak. Wage growth is tepid, and the employment to population ratio for people 25 to 54 was 78.2 percent in December. The Fed’s preferred measure of price inflation, the Bureau of Economic Analysis’ index of personal consumption expenditures, rose by 1.6 percent in 2016, the strongest performance in more than two years. But inflation remains below the Fed’s goal of a 2 percent annual pace — a goal the Fed has not achieved since 2011.
The vote to leave rates unchanged was unanimous, the Fed said. And the tempered language of the statement led investors to mark down the modest chance of a rate increase at the Fed’s next meeting, in March, from about 20 percent before the February statement to about 18 percent afterward, CME Group said.
Janet L. Yellen, chairwoman of the Fed, will have a chance to elaborate on the central bank’s economic outlook and policy plans when she delivers a semiannual report on monetary policy to Senate and House committees on Feb. 14 and 15.
In the meantime, the Fed is the rare corner of official Washington where nothing is happening. Contrasting a lively week at the White House and on Capitol Hill with the Fed’s announcement, Michael Feroli, the chief United States economist at JPMorgan Chase, declared the Fed’s headquarters “the most boring spot in Washington.”