Fed Officials Expected to Keep Rates Steady
Federal Reserve officials are likely to keep interest rates steady at their policy meeting this week and drill down into details about when and how to reduce their large holdings of mortgage and Treasury securities.
The challenge in their postmeeting policy statement will be to acknowledge the handful of disappointing economic growth indicators since officials last gathered in mid-March without suggesting they are ready to veer from the policy path they have sketched out at recent meetings. The two-day policy meeting begins Tuesday.
Officials raised interest rates at the March meeting to a range between 0.75% and 1% and penciled in two more quarter-percentage point increases this year. They also believe they are on course to signal late in the year that they will begin winding down their securities portfolio.
Gross domestic product grew at a 0.7% annual rate in the first quarter, as consumers reined in spending despite a surge in household confidence surveys and a rise in stock prices. The report isn't likely to cause too much alarm at the Fed because of signs temporary factors suppressed spending and because the economy in recent years has slowed at the start of the year before picking up speed in the spring and summer.
Inflation also weakened unexpectedly in March. The Labor Department's consumer-price index declined a seasonally adjusted 0.3% in March from the prior month, and prices excluding food and energy fell 0.1%, the first decline for so-called core prices since 2010.
Still, officials believe the economy is near full employment, meaning inflation should slowly build in the months ahead. The unemployment rate fell to 4.5% from 4.7%, hitting its lowest level in almost a decade.
Fed officials have signaled in public statements and interviews any disappointing data points haven't been enough to change their rate outlook.
Given recent seasonal patterns, "something that looks like 1% in the first quarter -- it might be actually more like 2% in reality," said New York Fed President William Dudley after a speech in New York on April 7.
After years of pushing down on the gas pedal, the Fed's job now is to allow "the economy to kind of coast and remain on an even keel, to give it some gas, but not so much that we're pressing down hard on the accelerator," said Fed Chairwoman Janet Yellen in remarks on April 10 in Ann Arbor, Mich.
Continuing to gradually remove large amounts of stimulus "seems likely both to maximize the prospects of a continued expansion in the U.S. economy and to mitigate the risk of undesirable spillovers abroad," said Fed Vice Chairman Stanley Fischer in remarks at a conference in Washington on April 19.
Also, potential growth shocks from abroad, which forced the Fed to scale back its plans to raise rates in 2015 and 2016, have held at bay so far this year. More resilient global growth is making officials less worried about the latest batch of somewhat discouraging domestic data.