Fed slows down plans to pur­sue in­ter­est rate in­creases

The Pak Banker - - OPINION - BINYAMIN AP­PEL­BAUM

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.

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