Fed Holds Rates Steady, Sees Recent Economic Slowdown as Temporary

By Nick Timiraos Features Dow Jones Newswires

WASHINGTON-The Federal Reserve held short-term interest rates steady and offered little indication Wednesday that recent softness in economic data would alter its plans to proceed with gradual interest rate increases this year.

Continue Reading Below

Following a two-day policy meeting, officials unanimously held their benchmark rate steady in a range between 0.75% and 1%, while noting in a statement that slow growth earlier this year was "likely to be transitory."

The central bank raised rates by one quarter percentage point at their March meeting, when officials penciled in two more quarter-point moves this year. Many analysts expect those actions in June and September.

Investors hadn't expected the Fed to raise rates Wednesday and were looking for signals about whether recent softness in economic data, including a slowdown in inflation in March, might alter plans for their next meeting, June 13-14. As of Wednesday morning, investors placed a roughly 70% probability of at least one rate increase by June.

While officials noted that economic activity had slowed, they also pointed to continued strengthening in the labor market and firmer spending from businesses, which has lagged in recent quarters.

Despite only modest gains in household spending, the statement said, "the fundamentals underpinning the continued growth of consumption remained solid."

Continue Reading Below

The statement echoes recent public comments from Fed officials that indicate the bar to knock the Fed off of its policy path could be higher now than it was in previous years.

Fed officials were also set to drill down into details about when and how to reduce the bank's large holdings of mortgage and Treasury securities at Wednesday's meeting, continuing a discussion that they kicked off in March.

The postmeeting policy statement didn't offer any details on the securities portfolio discussion, meaning investors will need to wait at least until the May 24 release of the minutes from the meeting to gather more information about how much work remains to forge consensus over their strategies.

Another set of key dates before next month's meeting will be the release of the employment reports for April, this Friday, and for May, on June 2.

The central bank's meeting this week followed a stretch of somewhat discouraging reports about the economy. Gross domestic product grew at a 0.7% annual rate in the first quarter as consumers reined in spending despite recent surges in household confidence surveys and an increase in stock prices.

Inflation also weakened unexpectedly in March. The Fed's preferred measure of inflation dropped 0.2% in March from a month earlier, pushing annual increases back below the central bank's 2% target, according to data released Monday. Compared with a year earlier, overall prices rose 1.8% in March, while prices excluding food and energy rose 1.6%.

While progress on the inflation front has been uneven, economists increasingly believe the central bank has neared its congressional mandate to seek full employment, meaning the economy provides as many jobs as possible without triggering inflation. The unemployment rate fell to 4.5% in March, the lowest level in nearly a decade. The Fed's policy statement Wednesday characterized recent average monthly job growth as "solid."

Economic growth is widely expected to pick up this spring, though the results so far have been mixed. Auto makers reported demand last month turned surprisingly sluggish.

The central bank continued to describe the risks to its outlook as "roughly balanced," meaning officials consider it equally likely the economy will perform better or worse than projected. That's in line from its reading of the economy in recent months but a shift from the past few years, in which officials considered it more likely the economy would fall short of its forecasts.

More resilient global growth is a big reason for the more balanced outlook. In each of the past two years, Fed officials have signaled plans to raise interest rates several times, only to watch economic volatility derail those plans.

"The global economy, which was quite weak, now seems to be operating in a slightly more robust and healthier way," Fed Chairwoman Janet Yellen said in April remarks in Ann Arbor, Mich.

Despite the recent soft patch in domestic economic data, traders in futures markets have placed greater probabilities of a Fed rate increase ever since the first round of voting in the French election on April 23. Markets rallied after centrist candidate Emmanuel Macron advanced to the final round of voting on Sunday against Marine Le Pen, the far-right nationalist who wants to withdraw France from the European Union's common currency.

Financial conditions have been mixed since the Fed last met in March, with stocks pulling back from their highs and bond yields falling, in part as investors recalibrate their expectations about President Donald Trump and the Republican Congress's ability to deliver on fiscal policy.

Markets rallied sharply last November after Mr. Trump's surprise election win, and some officials said Mr. Trump's proposed tax cuts and spending increases could cause the economy to grow faster than projected, which could cause too much inflation and force the Fed to raise rates more than anticipated.

But since the Fed last met, Congress has struggled to forge consensus on several of the administration's priorities, including how to cut taxes and repeal parts of the 2010 Affordable Care Act, suggesting lawmakers might narrow the White House's fiscal policy ambitions.

-0-

(END) Dow Jones Newswires

May 03, 2017 14:15 ET (18:15 GMT)