Fed holds steady on rates as economy strengthens

Fed holds steady on rates as economy strengthens

The Federal Reserve on Wednesday announced it would keep interest rates unchanged as inflation remains low despite a burst of economic activity during the first quarter of 2019.

The central bank’s Federal Open Markets Committee (FOMC), which sets monetary policy, was widely expected to hold the federal funds rate at a 2.25 to 2.5 percent range. The lack of action keeps in place a pause on interest rate hikes initiated by the central bank in January.

Top Fed officials, including Chairman Jerome Powell, have said throughout the year that the bank will be “patient” with rate adjustments as the U.S. economy remains strong despite concerns of a global slowdown.

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the FOMC said in a Wednesday statement. Sylvan Lane breaks down their decision here.

 

The background: The Fed raised interest rates seven times over the past two years in a bid to stave off inflation as the economy expanded.

  • Unemployment remains close to record lows at 3.8 percent as of March, and the economy added an average of 180,000 jobs in the first three months of 2019.
  • U.S. gross domestic product also grew at an annual rate of 3.2 percent in the first three months of the year, according to federal data released last week. And the Commerce Department on Monday said consumer spending in March rose at the highest rate in close to a decade.
  • Even so, inflation has lingered well below its target range of 2 percent, with core consumer goods prices only rising 1.6 percent in the past 12 months.

 

The rationale: Powell said that declining inflation was “not expected” but is likely due to “transitory” factors such as notable drops in asset management fees, apparel prices and airfare. He added that the decline would not change the Fed’s expectation that inflation will move toward the 2 percent target.

  • “We think our monetary policy stance is in a good place and we are going to be patient,” Powell said Thursday. “We don’t feel like the data is pushing us in either direction.”

 

The backlash: The Fed chairman has had to walk a fine line as he has faced criticism from President Trump and Wall Street over his stewardship of interest rates and the nation’s economy.

Trump criticized the Fed on Tuesday, a day before the announcement, in a pair of tweets bashing the bank for hiking rates despite low inflation. He also slammed the Fed for gradually selling off billions of dollars in bonds purchased during the financial crisis, reversing efforts to stimulate the economy.

“Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening,” Trump tweeted, referring to the central bank’s efforts to cut its debt holdings. The Fed’s moves to sell bonds purchased during the crisis has the effect of pulling money out of the economy, potentially tightening financial conditions.

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