US Fed leaves benchmark interest rate unchanged

Janet yellenMark Wilson/Getty ImagesFederal Reserve Board Chair Janet Yellen.

The Federal Reserve on Wednesday left its benchmark interest rate unchanged, as expected.

In its latest monetary policy statement, the policy-setting committee said the labour market had improved even though there were several signs of a broader economic slowdown.

The Fed removed language indicating that global markets posed a risk to the US economy. Compared to the beginning of the year, global financial conditions have stabilised.

For many economists, the next plausible chance of a rate hike is at the Fed’s meeting in June. The Fed’s statement showed it continues to expect to raise rates slowly and in response to strong economic data.

But one member of the policy-setting Federal Open Markets Committee (FOMC) — Kansas City Fed president Esther George — thought it was appropriate to raise the benchmark rate by another 25 basis points at the just-concluded meeting. She was the only one that disagreed with the consensus.

The Fed raised its benchmark interest rate for the first time in nine years in December, to a range of 0.25% to 0.50%.

It was motivated to raise borrowing costs by a robust labour-market rebound from the recession and its bets that inflation will rise to its 2% target.

Economists were hoping to glean from the statement how the Fed is assessing risks to the US economy, and what this says about the prospects for higher interest rates in June or later this year.

Stocks fell right after the statement crossed, but overall they were basically flat.

Here’s the full text of the statement:

Information received since the Federal Open Market Committee met in March indicates that labour market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labour market. Inflation has continued to run below the Committee’s 2 per cent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 per cent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labour market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 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.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 per cent.

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