Federal Reserve keeps interest rates steady, cites concerns about U.S. economic growth

by Wesley Brown ([email protected]) 126 views 

The Federal Reserve on Wednesday decided to maintain its “accommodative” monetary policy as the nation’s fiscal chiefs voted to leave the key interest rate at the current level in hopes that the U.S. economy picks up steam sometime this year.

In a statement following the end of the Federal Open Market Committee’s two-day meeting, the fiscal panel said although labor market conditions have improved since the last FOMC meeting in March, economic activity in the U.S. appears to have slowed.

“Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent,” the FOMC said. “The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”

Following Wednesday’s meeting, it now seems that Fed Chair Janet Yellen and other Fed committee members have added concerns about decelerating U.S. Gross Domestic Product growth in the second half of 2015 and the first quarter of 2016 to their list of anxieties about raising interest rates.

The FOMC said it currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor 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% over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further,” the FOMC said. “The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Still, Esther George, president and CEO of the Federal Reserve Bank in Kansas City, decided to challenge the current policy, saying that she preferred to raise the target range for the federal funds rate to 0.5% to 0.75%. Fed Vice Chairman William Dudley, St. Louis Fed President James Bullard and the other members of the FOMC voted with Yellen to hold interest rates steady.

Given George’s dissent, Yellen and supporters of the accommodative policy will not have to wait long to find out if their current stance supports their fears about stalled U.S. economic growth. On Friday (April 29), the U.S. Bureau of Economic Analysis will release its first look at GDP growth for the first quarter of this year. After today’s Fed meeting, the Atlanta Federal Reserve updated its GDPNow model forecast for real GDP growth in the first quarter to a weak 0.6%, up from earlier estimates of 0.4%.

Even with the improved forecast, Friday’s highly-awaited economic report is expected to show that the U.S. economy has slowed considerably since the second quarter of 2015, when real U.S. GDP accelerated at a robust 3.9%. In the third quarter, GDP slowed to 2% and slipped even further in the fourth quarter to a tepid 1.4%.

Meanwhile, the FOMC said in determining the timing and size of future adjustments to the target range for the federal funds rate in the future, it will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% 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,” the panel said. “In light of the current shortfall of inflation from 2%t, the Committee will carefully monitor actual and expected progress toward its inflation goal.”

Giving some hope to George and other supporters of regular rate hikes, Yellen and other members of the monetary panel said they expect economic conditions will improve enough to support some future rate hikes, albeit “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,” the committee said. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Following the Fed’s decision to keep the nation’s bellwether interest rate unchanged, Wall Street reaction was mixed in today’s late session. In late trading Wednesday, the Dow Jones Industrial Average was up 0.48% or 86.19 at 18,076.10. The S&P 500 also rose 0.34%, or 7.04 at 2099.19. However, the tech-driven Nasdaq stock exchange, which was caught in the downdraft of Apple Inc.’s disappointing quarterly earnings results, was down 0.4%, or 19.87 at 4868.27.