Fed slows down plans to pursue interest rate increases
THE Federal Reserve has once again pared its plans for raising interest rates, citing the weakness of the global economy as a reason for greater caution about the prospects for domestic growth. The Fed's policy-making committee voted not to raise its benchmark rate at a meeting that ended on Wednesday, although general expectations at the beginning of the year were for an increase this month. And it pulled back sharply from a December prediction that the rate would rise by one percentage point this year. Fed officials now expect to raise rates by just half a percentage point this year.
Janet L. Yellen, the Fed's chairwoman, said the central bank remained relatively optimistic about the domestic economy, which she said had shown no signs of damage from the wobbles of financial markets or from weak global growth. But she said that prudence dictated caution. "What you see here is a virtually unchanged path of economic projections and a slightly more accommodative path" for monetary policy, Ms. Yellen told a news conference on Wednesday.
The Fed's prolongation of its stimulus campaign pleased investors. The Standard & Poor's 500-stock index rose sharply when the Fed made its announcement, and closed up 0.56 percent for the day. After a rough start to the year, the major stock gauges have nearly recouped their losses.
The Fed entered the year planning to raise its benchmark rate about one percentage point, most likely in four quarter-point increments. Officials backed away from those plans after financial conditions tightened in January because of concerns about the health of the global economy. Officials said they were waiting to assess the impact of market turmoil on the broader economy. On Wednesday the Fed made clear that its plans had been delayed but not derailed. It issued a relatively upbeat assessment of economic conditions and affirmed plans to raise rates gradually.
"Economic activity has been expanding at a moderate pace despite the global economic and financial developments in recent months," the Federal Open Market Committee, the Fed's policy-making committee, said in a statement at the conclusion of the scheduled two-day meeting.
The statement did not clarify the timing of the Fed's next move. The committee next meets in April and June. Analysts and investors do not expect another rate increase until June. Ms. Yellen gave two principal reasons that the Fed was now planning to move more slowly. First, while the United States has outpaced other developed nations in recent years, Ms. Yellen said weak global growth posed a continuing threat.
Lael Brainard, a Fed governor, argued in a recent speech that the Fed might be constrained in its ability to raise rates at a time when other major central banks are still engaged in aggressive stimulus campaigns. Ms. Yellen, asked about this assessment, acknowledged that such policies can weigh on domestic growth, for example by strengthen- ing the dollar, which reduces demand American goods overseas.
Second, Ms. Yellen said, financial markets are doing some of the Fed's work. Tighter financial conditions, like increased borrowing costs faced by some corporations, are the effective equivalent of Fed rate increases.
There was one dissent on Wednesday. Esther L. George, president of the Federal Reserve Bank of Kansas City, voted to raise rates by a quarter-point. The statement did not explain her reasons; she has said in recent speeches that higher rates are appropriate given the strength of domestic growth.
Some analysts agree. "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, chief economist at Pantheon Macroeconomics. "Denial only works up the point where the data are unambiguously telling the opposite story; that point is not far off."
Fed officials, however, predicted the pace of rate increases would slow in coming years. Their median estimate is that the Fed's benchmark rate will hit 3 percent by the end of 2018. The plans for a slower climb are not a result of a change in the Fed's economic outlook. Officials at the central bank still expect the economy to expand at an annual rate of about 2 percent, and they still expect inflation to rise gradually, remaining below a 2 percent annual pace until 2018.