The Federal Reserve left interest rates unchanged while saying risks to the U.S. economy have subsided and the labor market is getting tighter, suggesting conditions are getting more favorable for an increase in borrowing costs.
“Near-term risks to the economic outlook have diminished,” the Federal Open Market Committee said in its statement on Wednesday after a two-day meeting in Washington, before repeating language from June that the panel “continues to closely monitor” inflation and global developments. Job gains were “strong” in June and indicators “point to some increase in labor utilization in recent months,” the Fed said.
U.S. central bankers are taking stock of the economy’s progress in the wake of the U.K.’s vote last month to leave the European Union, as well as the large swing from May’s soft labor report to June’s rebound. While Chair Janet Yellen has repeatedly stated that the Fed is likely to raise interest rates gradually, market volatility and the unexpected dip in job gains have delayed such plans.
“It’s kind of an upbeat statement, although guarded,” said Roberto Perli, partner at Cornerstone Macro LLC in Washington and former associate director for monetary affairs at the Fed Board. “It’s a sign of a little bit of confidence, if you want, in the outlook going forward.”
The committee repeated that it expects “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” There was no reference to the specific timing of the next potential rate hike.
Data since the Fed’s June meeting indicate “that the labor market strengthened and that economic activity has been expanding at a moderate rate,” the Fed said. The statement contained three references to recent improvement in the labor market.
The central bank left the target range for the benchmark federal funds rate at 0.25 percent to 0.5 percent, where it’s been since a quarter-point increase in December that ended seven years of near-zero rates.
Household spending “has been growing strongly,” while business investment “has been soft,” the FOMC said. The Fed reiterated that it expects inflation to rise to its 2 percent target over the medium term.