Fed leaves key rate unchanged, signals no shift in its stance
WASHINGTON — The Federal Reserve left its key interest rate unchanged Wednesday and signaled that it’s unlikely to either raise or cut rates in the coming months, noting signs of renewed economic health but unusually low inflation.
The Fed left its benchmark rate — which influences many consumer and business loans — in the range of 2.25% to 2.5%. Its low-rate policy has helped boost stock prices and supported a steadily growing economy.
A statement from the Fed spotlighted its continuing struggles to lift annual inflation to its 2% target rate. The Fed’s preferred 12-month inflation barometer is running at about 1.5%. In pointing to persistently low inflation, the statement might have raised expectations that the Fed’s next rate change, whenever it happens, could be a rate cut. The Fed cuts rates when it’s trying to stimulate inflation or growth.
But at a news conference later, Chairman Jerome Powell didn’t hint at any potential coming rate cut. He suggested that the current inflation readings may be transitory or might not be fully capturing real-world price increases.
“The committee is comfortable with our current policy stance,” Powell said.
His comments appeared to deflate a modest stock market rally that occurred after the Fed issued the statement with its mention of unusually low inflation. Stock losses deepened later in the afternoon.
The Fed made a technical adjustment Wednesday to reduce the interest it pays banks on reserves as a way to keep its benchmark rate inside its approved range, rather than at the upper end of that range.
The central bank’s decision to make no change in its rate policy — approved on a 10-0 vote — had been expected despite renewed pressure from President Donald Trump for the Fed to cut rates aggressively to help accelerate economic growth.
The Fed expressed a more upbeat view of the economy, saying that “economic activity rose at a solid rate.” In March, the Fed said it appeared that growth had slowed from the fourth quarter of last year.
The generally brighter outlook for the economy and the stock market represents a sharp rebound from the final months of 2018, when concerns about a possible global recession and fear of further Fed rate increases had darkened the economic picture. Stock prices tumbled late last year, especially after the Fed in December not only raised rates for the fourth time in 2018 but also suggested that it was likely to keep tightening credit this year.
Yet starting in January, the Fed reversed its stance, suggesting that it was finished raising rates for now and might even act this year to support rather than restrain the economy. Its watchword became “patient.” And investors have responded with a major stock market rally.
The market gains have also been fed by improved growth prospects in China and some other major economies and by the view that a trade war between the world’s two biggest economies, the United States and China, is nearing a resolution.
Last week, the U.S. government reported that the economy grew at a surprisingly strong 3.2% annual rate in the January-March quarter. It was the best performance for a first quarter in four years, and it far surpassed initial forecasts that the growth rate could be as weak as 1% at the start of the year.
According to data tracked by the CME Group, investors foresee no probability that the Fed will raise rates anytime this year. In fact, their bets indicate a roughly 60% likelihood that the Fed will cut rates before year’s end.
One factor in that dovish view is that the economy might not be quite as robust as the latest economic figures suggest. The first quarter’s healthy 3.2% annual growth rate was pumped up by some temporary factors — including a surge in the restocking of companies’ inventories and a narrowing of the U.S. trade deficit — that are expected to reverse themselves. If so, this would diminish the pace of growth and likely hold down inflation.
Indeed, some analysts say 2019 growth is expected to total about 2.2%, down from last year’s 2.9% gain, as the effects of the 2017 tax cuts and billions of dollars in increased government spending fade.
At the same time, the Fed is struggling to produce inflation of roughly 2%. This week, the government reported that the Fed’s preferred inflation gauge rose just 1.5% in March from 12 months earlier. Many analysts say they think the Fed won’t resume raising rates until inflation hits or exceeds the 2% target.
Too-low inflation is seen as an obstacle because it tends to depress consumer spending, the economy’s main fuel, as people delay purchases in anticipation of flat or even lower prices. It also raises the inflation-adjusted cost of a loan.
In the meantime, Trump has criticized Powell’s leadership as being too restrictive toward rates and has pressed the Fed to cut rates — something few mainstream economists favor.
On Tuesday, Trump tweeted that the U.S. economy has “the potential to go up like a rocket” if the Fed would slash rates and resume the emergency bond-buying programs it unveiled after the recession to ease long-term loan rates to stimulate spending and growth.
Asked at his news conference about Trump’s remarks, Powell replied that the Fed is a “nonpolitical institution” that doesn’t consider outside criticism in making its policy decisions.
“We don’t think about other factors” beyond how the economy and financial system are faring, Powell said. He said the Fed’s rate-setting panel thinks its rate policies are “in a good place.”
But at a news conference later, Chairman Jerome Powell didn’t hint at any potential coming rate cut. He suggested that the current inflation readings may be transitory or might not be fully capturing real-world price increases.