Fed holds off rate hike as inflation stays low
WASHINGTON — The Federal Reserve is keeping its key interest rate unchanged at a time when inflation remains persistently low. But it signaled yesterday it is edging closer to gradually shrinking its bond holdings, a step that would likely boost longterm borrowing rates including mortgages.
The Fed noted yesterday in a statement that inflation has stayed undesirably low even though the job market keeps strengthening, with the unemployment rate just 4.4 percent. Normally, solid hiring drives up wages and prices. But the Fed’s preferred inflation gauge has moved further below its 2 percent target.
The central bank decided after its latest policy meeting to leave its key rate unchanged in a range of 1 percent to 1.25 percent after having raised rates twice this year. The Fed says it still envisions further “gradual” rate hikes. But many economists say they foresee no further rate increases this year.
Addressing its bond portfolio, the Fed slightly changed its statement to say such a reduction would begin “relatively soon,” provided the economy improves further. Many economists think the Fed will begin shrinking its balance sheet sometime this fall.
The Fed’s statement coincides with a period of lackluster growth for the U.S. economy. During the January-March quarter this year, the gross domestic product, the broadest gauge of economic health, grew at an anemic 1.4 percent annual rate — well below a healthy pace and far below the consistent 3 percent or more annual growth that President Trump’s administration has said it can achieve.