The Federal Reserve’s policy-setting committee left its benchmark interest rate unchanged at its two-day meeting.
It now expects to raise rates twice this year, down from its prior projection of four times, as it continues to monitor risks the global economy poses to its outlook.
Economists had widely expected that the Federal Open Market Committee (FOMC) would leave the rate in a range of 0.25% to 0.50%.
This was the second straight meeting when the FOMC made no change to interest rates since the first hike in nine years last December.
This was the Fed’s reasoning, from its statement (emphasis added):
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. However, global economic and financial developments continue to pose risks. 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 monitor inflation developments closely.
The Fed lowered its outlook for the US economy. It expects gross domestic product (GDP) growth of 2.1% to 2.3%, down from 2.3% to 2.5%.
Its inflation forecasts were also reduced, with core personal consumption expenditures (PCE) now expected in a range of 1.4% to 1.7%, from 1.5% to 1.7%. The Fed has a 2% inflation target.
The FOMC most likely did not rule out raising rates again during its meeting.
Since its January statement, data on the labour market and inflation have improved. And indeed, Wednesday’s statement noted that the economy grew at a moderate pace.
However, the Fed would also have considered that financial markets became extremely volatile after the December hike, even if it attributes the sell-offs to everything except itself.
And this volatility is one reason why the market’s expectation for higher rates is lower than the Fed’s.
Following the statement, stocks jumped after trading virtually flat earlier.
Here’s the full Fed statement:
Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, 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 picked up in recent months; however, it continued to run below the Committee’s 2 per cent longer-run objective, partly reflecting declines in energy prices and in 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. However, global economic and financial developments continue to pose risks. 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 monitor inflation developments closely.
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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