Feeling global slowdown, Fed keeps interest rate unchanged

The Federal Reserve cut its outlook for the US economy and kept its interest rate policy unchanged Wednesday, citing the impact of the global slowdown and turmoil in world markets.
Giving a picture of the US economy less bullish than many had expected, the Fed still forecast continuing hikes to the federal funds rate this year, but at a slower pace than foreseen in December.

That outlook kept the Fed still headed in the opposite direction of other leading central banks, with the European Central Bank and the Bank of Japan, among others, having cut interest rates into negative territory to fight off deflationary pressures and stagnant growth.

Fed Chair Janet Yellen said the policy-setting Federal Open Market Committee (FOMC) opted for "a slightly more accommodative path" compared with December, given "soft" US business investment and weak exports in recent months.

But, she added, "this decision partly reflects the implications for the US economy of the global economic and financial developments."

And she said notably that she was not convinced by apparent signs of a pickup in inflation.

In revisions to its buoyant December forecasts, the FOMC said it expects the US economy to grow only 2.2 percent this year, compared with 2.4 percent previously.

The FOMC said the labor market will continue to strengthen, predicting the unemployment rate would fall to 4.7 percent this year from the current level of 4.9 percent.

- Yellen dubious on inflation -
But the FOMC conceded that inflation is much weaker than it had expected just a few months ago, as the US economy suffers the same downward pull on prices that is troubling central banks in Japan and Europe.

The FOMC predicted that inflation would likely remain very low at 1.2 percent by the end of the year, far shy of its 2.0 percent policy target.

That seemed at odds with Wednesday's report of solid growth in core consumer prices of 2.3 percent year-on-year, which some analysts said was a clear sign that the Fed's efforts to push up inflation were having effect.

Moreover, Yellen's Fed deputy chair, Stanley Fischer, raised expectations last week when he cited "the first stirrings of an increase in the inflation rate."

But Yellen told a press conference after the FOMC meeting that she was unconvinced by apparent upward price pressures.

Some of the gains in prices, Yellen said, relate to "categories that tend to be quite volatile, without very much significance for inflation over time."

"So I'm wary, and haven't yet concluded that we have seen any significant uptick that will be lasting in, for example, in core inflation."

In its rate decision, the FOMC held the benchmark federal funds rate at an ultra-low 0.25-0.50 percent, where it was set in December.

At that time FOMC officials projected a likely four quarter-point interest rate increases this year. But in Wednesday's new projections, they indicated they expect the rate to end the year at about 0.9 percent, implying no more than two increases.

But some analysts argued that the Fed is being too cautious, and say it will have to change its tone in coming meetings.

"The doves have prevailed," said UniCredit economist Harm Bandholz. "The Fed is in our view increasingly falling behind the curve."

"We remain of the view that the data will in due course force the Fed to raise rates faster than they or the markets expect," said Ian Shepherdson of Pantheon Macroeconomics.

"Denial only works up to the point where the data are unambiguously telling the opposite story; that point is not far off."

The Fed's dovishness caught markets by surprise, sending the dollar down 1.1 percent against the euro and the 10-year Treasury yield down nearly 0.1 percentage point to 1.92 percent.

"We and most market participants expected something slightly more hawkish that would send a stronger signal that rates could rise again in mid-year," said currencies specialist Kit Juckes of Societe Generale.

Buoyed by the prospect of lower interest rates for longer, Wall Street surged after the FOMC statement, with the S&P 500 reversing earlier losses for a 0.6 percent gain.