Fed out­look dims, but a rate hike still looms

Yellen says boost­ing a key rate ‘will be ap­pro­pri­ate’ this year de­spite weaker eco­nomic forecast by cen­tral bank

Los Angeles Times - - BUSINESS - By Jim Puz­zanghera and Don Lee

WASHINGTON — Fed­eral Re­serve pol­i­cy­mak­ers sharply down­graded their view of the econ­omy — fore­cast­ing the weak­est an­nual growth since 2011 — but in­di­cated they were on track to raise a key in­ter­est rate in the com­ing months.

“It’s not an iron­clad guar­an­tee, but we an­tic­i­pate that that’s some­thing that will be ap­pro­pri­ate later this year,” Fed Chair­woman Janet L. Yellen told re­porters Wed­nes­day.

Fed pol­i­cy­mak­ers had said they could raise the short-term fed­eral funds rate, a bench­mark that af­fects mort­gage and other lend­ing and sav­ings rates, as early as this month if eco­nomic data war­ranted it.

Such a move, the first hike since 2006, would sig­nal the econ­omy was strong enough for the Fed to start ratch­et­ing up the un­prece­dented low rate put in place to help com­bat the Great Re­ces­sion and spur the re­cov­ery.

“I be­lieve a de­ci­sion to raise rates

would sig­nify very clearly that the U.S. econ­omy has made great progress in re­cov­er­ing from the trauma of the fi­nan­cial cri­sis and that we’re in a dif­fer­ent place,” Yellen said.

But af­ter wrap­ping up a two-day meet­ing, cen­tral bank pol­i­cy­mak­ers de­cided the econ­omy was not yet in that place.

They opted to keep the rate near zero, where it has been since late 2008 in an at­tempt to boost eco­nomic growth by mak­ing the cost of bor­row­ing money cheaper and in­creas­ing in­cen­tives to spend rather than save.

Still, Yellen and her col­leagues were clear: A rate hike is com­ing. Of the 17 par­tic­i­pants in the Fed’s meet­ing, 15 said they ex­pected a rate in­crease this year.

With a down­grade in pro­jected eco­nomic growth, though, more Fed of­fi­cials are ex­pect­ing a slower pace of in­creases. In their new pro­jec­tion, seven of the 17 pol­i­cy­mak­ers forecast the rate would be raised no more than once this year. In March, just three of­fi­cials were in that camp.

“The cen­ter of grav­ity at the Fed is un­de­cided whether they start in Septem­ber or De­cem­ber,” said Josh Fein­man, man­ag­ing di­rec­tor at Deutsche As­set Man­age­ment in New York and a for­mer Fed global mar­ket economist.

Those are the months for the next two meet­ings that in­clude a Yellen news con­fer­ence, and many Fed watch­ers be­lieve the cen­tral bank will raise the rate only when she has an op­por­tu­nity to go be­fore TV cam­eras and ex­plain the ac­tion.

Some econ­o­mists ar­gue that the Fed might be wait­ing too long to raise the rate and could be sow­ing the seeds of more bub­bles in the econ­omy.

Yellen ac­knowl­edged that the Fed prob­a­bly should have raised in­ter­est rates more ag­gres­sively in the mid­dle of the last decade, but apart from sound­ing a cau­tion­ary note about stock prices, she has not ex­pressed con­cerns about as­set val­ues and doesn’t want to risk squelch­ing a re­cov­ery that has been un­even and mod­er­ate.

Carl Tan­nen­baum, se­nior vice pres­i­dent at North­ern Trust Co. in Chicago, fore­casts the first rate hike of 0.25 per­cent­age point in Septem­ber and then another one like it in De­cem­ber, fol­lowed by sim­i­lar quar­ter­point in­creases ev­ery other meet­ing in 2016.

“It isn’t so much the date of liftoff but the tra­jec­tory of the or­bit that in­vestors care about,” he said.

In­vestors ap­peared re­lieved that the Fed didn’t raise the rate Wed­nes­day and sig­naled it would rise slower than pre­vi­ously es­ti­mated. The Dow Jones in­dus­trial av­er­age jumped nearly 100 points as Yellen spoke be­fore giv­ing back much of the gains. The Dow gained 31.26 points, or about 0.2%, to 17,935.74.

Hopes for a break­out year for eco­nomic growth were dashed this win­ter when the econ­omy shrank at a 0.7% an­nual rate. Econ­o­mists said the quar­terly con­trac­tion, the third since the re­ces­sion ended in 2009, was driven in large part by un­usu­ally bad win­ter weather and the la­bor dis­pute at West Coast ports.

Eco­nomic con­di­tions have im­proved in re­cent weeks, but the win­ter’s slow­down caused dam­age. Fed pol­i­cy­mak­ers pro­jected the econ­omy would grow only 1.8% to 2% this year, well be­low the range of 2.3% to 2.7% in its March forecast.

Yellen said she and her col­leagues view the first quar­ter’s dis­ap­point­ing eco­nomic per­for­mance as “largely tran­si­tory.” But she said they “would like to see more decisive ev­i­dence that a mod­er­ate pace of eco­nomic growth will be sus­tained.”

Although the hous­ing mar­ket “has shown some im- prove­ment,” Fed of­fi­cials said ex­ports and in­vest­ments by busi­nesses have been weak.

Cen­tral bank pol­i­cy­mak­ers were less op­ti­mistic about im­prove­ments in the job­less rate than they were three months ago, though they noted that the pace of job gains had im­proved.

They fore­casted that the un­em­ploy­ment rate, which was 5.5% in May, would drop to no lower than 5.2% by the end of the year. In March, they saw the job­less rate fall­ing to as low as 5% this year.

An­nual inf la­tion, slowed largely by de­clin­ing oil prices, is ex­pected to be 0.6% to 0.8% this year — the same as pre­dicted in March. That’s well be­low the Fed’s 2% tar­get.

Given the slow start to the year and the low inf la­tion, many an­a­lysts had ex­pected the Fed would not raise rates un­til at least Septem­ber. Some econ­o­mists have said they didn’t think the Fed would raise the rate un­til next year.

This month, of­fi­cials at the In­ter­na­tional Mon­e­tary Fund and the World Bank called on the Fed to wait un­til at least next year to start rais­ing its bench­mark rate out of con­cerns an in­crease could slow U.S. growth and roil the global econ­omy.

Yellen stressed that the Fed plans to raise rates slowly to avoid dam­ag­ing the econ­omy. Although wait­ing too long to raise rates could cause in­fla­tion to jump, she said, “be­gin­ning too early could risk de­rail­ing a re­cov­ery that we’ve worked for a very long time to try to achieve.”

IHS chief economist Na­ri­man Behravesh ex­pects the first rate in­crease in Septem­ber.

“It is al­most as though the Fed wants to get the first rate hike out of the way,” he said. “Af­ter that, it will take its time and will only grad­u­ally tighten mon­e­tary con­di­tions fur­ther.”

Bren­dan Smi­alowski AFP/Getty Im­ages

FED CHAIR­WOMAN Janet L. Yellen says at a news brief­ing Wed­nes­day that she and her col­leagues “would like to see more decisive ev­i­dence that a mod­er­ate pace of eco­nomic growth will be sus­tained.”

Richard Drew As­so­ci­ated Press

THE FED opted to keep the fed­eral funds rate near zero, where it has been since late 2008. Above, a New York Stock Ex­change trad­ing post.

Richard Drew As­so­ci­ated Press

IN­VESTORS ap­peared re­lieved that the Fed didn’t raise a key in­ter­est rate Wed­nes­day. Above, a trad­ing booth on the f loor of the New York Stock Ex­change.

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