Upbeat US Fed holds interest rates steady

The US Fed remains on track to gradually raise interest rates this year and gave no hint about timing of the next increase.

Janet Yellen is expected to give an update on the US economy when she speaks to Congress on February 14 and 15. Pic: AP

The US Federal Reserve says it remains on track to gradually raise short-term interest rates this year and gave no hint about when the next increase might come.

Following a two-day policy meeting, officials unanimously held their benchmark rate steady in a range between 0.50 per cent and 0.75 per cent, while noting in a statement some recent improvements in the economy. They lifted rates by a quarter percentage point in December and pencilled in three quarter-point moves in 2017.

Investors hadn’t expected the Fed to move today and were looking for a signal about their next meeting, March 14-15. Ahead of the announcement, investors placed a roughly 25 per cent probability of a rate increase then.

The central bank’s meeting this week came as the US economy shows signs of strengthening. Several officials have said the labour market is now operating at close to full strength with strong job growth keeping the unemployment rate at 4.7 per cent. Inflation has also moved closer to the Fed’s 2 per cent target, posting a 1.6 per cent increase in December over the previous year. Some of the rise can be attributed to stabilising oil prices. The Fed said it expects “inflation will rise to 2 per cent over the medium term.”

Economic growth, which slumped in the first part of 2016, appears to have found a firmer footing, growing at 1.9 per cent in the fourth quarter from the fourth quarter of 2015.

The statement also noted that “measures of consumer and business sentiment have improved of late.”

A gauge of consumer confidence hit a 15-year-high in December. Recent data also suggest that investors and consumers see stronger growth ahead. Market-based measures of inflation expectations have been rising in recent months.

The Fed didn’t mention any new developments that would knock it off its anticipated path of rate increases. The central bank statement described the risks to its outlook as “roughly balanced,” meaning officials consider it equally likely that the economy will perform better or worse than projected. Officials said they would continue to “closely monitor inflation indicators and global economic and financial developments.”

But economic volatility can emerge unpredictably.

In December 2015, for instance, Fed officials saw enough reason for optimism that they raised interest rates for the first time in nearly a decade and anticipated four quarter-point rate increases in 2016. That optimism faded in the first few months of 2016, when economic turmoil in China sent shivers through global markets. That was followed by a US hiring slump in the spring, market turbulence following the UK’s Brexit vote in June and uncertainty about the possible effects of the US presidential election in November-all of which led the Fed to hold off raising rates through most of the year. In the end, it lifted borrowing costs just once in 2016.

Some officials have said President Donald Trump’s proposed tax cuts and spending increases could cause the economy to grow faster than projected, which could cause too much inflation and lead the Fed to raise rates more than anticipated.

Mr Trump has also vowed to rewrite trade agreements, which could lead to more economic and financial uncertainty.

In a speech in San Francisco last month, Federal Reserve Chairwoman Janet Yellen mentioned “the potential for changes in fiscal policy to affect the economic outlook and the appropriate policy path.”

The Fed’s statement today made no mention of fiscal policy or of Mr Trump’s proposals.

Officials are set to release updated economic projections following their March meeting and Ms Yellen is expected to hold her quarterly press conference. By then, officials will have inflation data for January as well as two more employment reports, for January and February.

Ms Yellen is also scheduled to speak before Congress on February 14 and 15, where she could offer an update on the economy’s progress and the Fed’s plans for interest rates.

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Below is the statement the Fed released after its policy meeting ended:

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee’s 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

This assessment will take into account a wide range of information, including measures of labor 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 percent, 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; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Daniel K. Tarullo.

Dow Jones Newswires, AP