The Federal Reserve ended its June rate policy setting meeting with a unanimous vote against raising its short-term rate, a non-move that was expected despite intensive focus at the start of the year that June might be the likely time for the central bank’s first rate hike in nine years.
“We have seen some progress” in the economic recovery, Federal Reserve Board Chairwoman Janet Yellen said at a press conference on Wednesday. “Even so, the committee judged that economic conditions do not yet warrant an increase in the federal funds rate.”
Liftoff for the Fed’s near-zero rate was likely doomed late last month when the government reported that first-quarter GDP actually contracted at an annual rate of 0.7%, shrinking for the third time since the start of what has been a tepid economic recovery dating from 2009.
Prior to that that report, which the Commerce Department blamed on the depressive effects of a brutal winter, multiple hints by officials including Yellen led many on Wall Street to expect this year, and June’s meeting particularly, as the start of a process of rate normalization.
Investment firm PIMCO was typical of the consensus. Its 12-month outlook issued in mid-March, authored by the firm’s managing directors Andrew Balls and Richard Clarida, forecast June as a likely start to a monetary tightening trend that would occur gradually.
“We expect the Fed to start tightening policy in June, September or December, and to proceed at a fairly slow pace, with a hike every other meeting, at least at the outset,” the firm’s execs wrote.
In a statement issued at the conclusion of their two-day meeting on Wednesday, Federal Open Market Committee (FOMC) members reiterated their desire to raise rates, but said nevertheless determined that economic conditions make the current zero to 0.25% target range for the federal funds rate “appropriate.”
The FOMC was upbeat on employment, saying “job gains picked up while the unemployment rate remained steady.”
But the policy-setting committee said “inflation continued to run below the Committee’s longer-run objective,” blaming declines in energy prices and imports, though offering the upbeat assessment that “energy prices appear to have stabilized.”
In setting rates, the Federal Reserve has a dual mandate of maximum employment and price stability. While pleased with job growth, the Fed’s June statement was explicit in seeking an inflation rate of 2%, and forecast that the U.S. economy would reach this level “over the medium term.” When this level of inflation is reached, and amid continuing satisfactory employment levels, the Fed intends to increase rates at a slow pace.
“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” is how the FOMC expressed its intentions.
In a summary of economic projections released along with the FOMC meeting minutes, policy makers on balance expect weaker GDP growth for 2015, in the 1.8 to 2% range, than last year’s figure of 2.4%. The FOMC members expect the pace of growth to pick up next year, however, projecting GDP growth in the 2.4% to 2.7% range.
The central bank policymakers are upbeat about unemployment, which has declined steadily from 9.5% in 2010 to 8.7% in 2011, 7.8% in 2012, 7% in 2013 and 5.7% last year. Committee members anticipate the rate falling to 5.2% or 5.3% this year.
Most worrying to committee members is inflation, which has fallen steadily amid the recovery from 2.7% in 2011 to 1.1% last year, and which the Fed expects to fall further this year to between 0.6% and 0.8% this year. Members think it could rise as high as 1.9% next year before achieving 2% as early as 2017.
In the Fed’s March meeting, fully 15 out of 17 members anticipated hiking rates this year. Their next meeting in late July will reveal how that balance has changed during the current session.
By maintaining low rates, the Fed is indicating that the economy remains weak, and it wants low rates to induce economic activity, for example by encouraging borrowers to take out loans at low rates and investors to buy risk assets such as stocks and bonds while eschewing savings accounts with interest rates near zero.
Raising rates lowers the supply of available money and helps keep inflation in check.
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