Fed stays put with interest rates amid concerns about low inflation
WASHINGTON — The Federal Reserve left interest rates unchanged Wednesday and conveyed a tad more concern about recent inflation trends, clouding the prospects for when the next rate hike might come.
At the same time, the central bank said after its two-day meeting that U.S. economic conditions looked good, with job growth solid and consumer and business spending continuing to expand.
And the Fed gave further signals that it was close to paring down the $4.5 trillion in U.S. Treasury and mortgage-backed securities it accumulated during and after the financial crisis in 2008.
A shrinking of those assets, like raising interest rates, is aimed at normalizing monetary policy and removing the extraordinary support the Fed has provided to the economy over the past decade.
Analysts think the Fed will launch that process at its next meeting Sept. 19-20, an expectation reinforced by Wednesday’s statement that it would begin shedding the holdings “relatively soon,” as opposed to its prior guidance that it would happen “this year.”
"A start date for the balance sheet normalization is all teed up for the September meeting,” said Greg McBride, chief financial analyst at Bankrate.com, a research firm.
A reduction of Fed assets is expected to nudge up mortgage and interest rates, but policymakers are planning to act gradually and in a predictable manner, increasing the amount of maturing securities it will unload each month, with the whole process expected to take a few years.
Of greater short-term uncertainty is when the Fed will make its next interest rate hike.
Policymakers have taken measured steps to raise interest rates in each of the last three quarters, after years of keeping them at rock bottom levels to stimulate the economy.
By the Fed’s latest forecast in June, another quarter-point rate increase should come before the year is up. The Fed’s benchmark overnight rate is now between 1 percent and 1.25 percent.
But inflation has eased in the last three months, slipping further below the Fed’s 2 percent target, even though job growth has been strong. Typically, a tightening labor market should be pushing up wages and inflation.
Fed Chair Janet Yellen has regarded the recent softening in inflation as mostly a blip due to special factors like cuts in cellphone plans.
In June, when the Fed last lifted its federal funds rate, officials acknowledged that inflation was running “somewhat below” their 2 percent goal. At that meeting, there was one dissent to raising the rate among the nine voting members.
Wednesday’s statement, which was approved unanimously, erased the word “somewhat,” and reiterated that policymakers will be carefully watching actual and expected inflation measures. The statement, as before, also said that the Fed expects inflation to stabilize around the 2 percent figure over the medium term.