Key rate stays put for now, Fed says

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - In­for­ma­tion for this ar­ti­cle was con­trib­uted by Martin Crutsinger of The As­so­ci­ated Press, by Binyamin Ap­pel­baum of The New York Times and by Craig Tor­res of Bloomberg News.

WASH­ING­TON — The Fed­eral Re­serve on Wed­nes­day de­cided to keep its bench­mark in­ter­est rate un­changed, but it sig­naled that it’s edg­ing closer to grad­u­ally shrink­ing its bond hold­ings, a move that will lead to higher long-term bor­row­ing rates for mort­gages and credit cards, econ­o­mists say.

The cen­tral bank de­cided af­ter end­ing 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 in March and June.

The Fed says it still en­vi­sions fur­ther “grad­ual” rate in­creases. But many econ­o­mists say they fore­see no fur­ther rate in­creases this year un­less in­fla­tion picks up.

Fed of­fi­cials said in­fla­tion has stayed un­de­sir­ably low even though the job mar­ket keeps strength­en­ing, with the U.S. un­em­ploy­ment rate just 4.4 per­cent. Nor­mally, solid job growth drives up wages and prices. But the Fed’s pre­ferred gauge of in­fla-

tion has moved fur­ther be­low its 2 per­cent tar­get in re­cent months.

With the U.S. job mar­ket still solid af­ter eight years of a grind­ing but durable re­cov­ery, the Fed has es­sen­tially met one of its two man­dates — to max­i­mize em­ploy­ment. But it has so far failed to achieve its other goal of sta­bi­liz­ing in­fla­tion at a fa­vor­able level.

In­fla­tion has been edg­ing fur­ther be­low the Fed’s 2 per­cent tar­get in re­cent months. The prob­lem is that too-low in­fla­tion can slow the econ­omy by caus­ing con­sumers to de­lay pur­chases if they think they can buy a prod­uct or ser­vice for a lower price later.

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 bal­ance sheet has soared five­fold — to $4.5 tril­lion — since the sum­mer of 2008, just be­fore the fi­nan­cial cri­sis be­gan. The bal­ance sheet grew as a re­sult of bond pur­chases by the Fed that were in­tended to lower longterm loan rates and stim­u­late a strug­gling econ­omy.

Now, the re­verse is ex­pected: A sell-off of the bonds, even a grad­ual one, would likely make some long-term loans for con­sumers and busi­nesses more ex­pen­sive.

“The Fed is shift­ing their im­me­di­ate fo­cus away from short-term in­ter­est rates and to­ward be­gin­ning the nor­mal­iza­tion process of the $4.5 tril­lion bal­ance sheet,” said Greg McBride, chief fi­nan­cial an­a­lyst at Bankrate.com.

Un­der its exit plan, which it de­scribed in June, the Fed would grad­u­ally re­duce its hold­ings — ini­tially at the slow pace of $10 bil­lion a month.

McBride said this shift could rep­re­sent a “re­prieve for credit card holders and home eq­uity bor­row­ers,” whose rates are more in­flu­enced by the Fed’s bench­mark rate.

Many econ­o­mists say they think the Fed could an­nounce af­ter its Septem­ber meet­ing a pre­cise date for the start of the bond re­duc­tions. Some fore­see the process be­gin­ning in Oc­to­ber.

“A start date for the bal­ance-sheet nor­mal­iza­tion is all teed up for the Septem­ber meet­ing,” McBride said.

Months ago, the Fed had sig­naled its readi­ness to raise rates three times this year on the as­sump­tion that it needed to be more ag­gres­sive to en­sure that con­sis­tently low un­em­ploy­ment didn’t con­trib­ute to high in­fla­tion later on.

But in tes­ti­fy­ing to Congress this month, Fed Chair­man Janet Yellen had sounded less sure about her pre­vi­ous po­si­tion that the slow­down in in­fla­tion this year was be­cause of such tem­po­rary fac­tors as a big drop in charges for cell­phone plans.

Yellen con­ceded that Fed of­fi­cials were puz­zled by re­cent de­vel­op­ments. Her re­marks lifted fi­nan­cial mar­kets as in­vestors in­ter­preted her words to sug­gest that the Fed might slow its pace of rate in­creases.

Over the past 12 months, the in­fla­tion gauge the Fed mon­i­tors most closely has risen just 1.4 per­cent, ac­cord­ing to the lat­est data. That’s down from a 1.9 per­cent yearover-year in­crease in Jan­uary. Many econ­o­mists say they think the Fed will put off any fur­ther rate in­creases un­til in­fla­tion re­sumes ris­ing to­ward its 2 per­cent tar­get.

Af­ter leav­ing its key rate at a record low near zero for seven years af­ter the 2008 fi­nan­cial cri­sis, the Fed has raised it mod­estly four times — in De­cem­ber 2015, De­cem­ber 2016 and twice so far this year, in March and June. Even now, the rate re­mains his­tor­i­cally low and sig­nif­i­cantly be­low the 3 per­cent level that the Fed sees as “neu­tral.” That’s the point at which the Fed’s bench­mark rate nei­ther stim­u­lates nor slows eco­nomic ac­tiv­ity.

Mar­kets have largely shaken off the Fed’s re­treat. Bor­row­ing costs re­main low and loan terms have shown lit­tle sign of tight­en­ing.

“I ex­pect an an­nounce­ment of the on­set of the bal­ance-sheet re­duc­tion at the con­clu­sion of the Septem­ber meet­ing, ef­fec­tive on the first of Oc­to­ber,” Carl Tan­nen­baum, chief econ­o­mist at North­ern Trust Corp. in Chicago, said af­ter Wed­nes­day’s state­ment.

In her re­cent con­gres­sional tes­ti­mony, Yellen didn’t rule out an­other rate in­crease this year. But in­vestors have them­selves grown more un­cer­tain, with the CME Group’s closely watched gauge fore­see­ing a 52 per­cent chance of an­other rate in­crease by year’s end.

The Fed’s state­ment Wed­nes­day 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 a 1.4 per­cent an­nual rate — well be­low a healthy pace and far be­low the consistent 3 per­cent or more an­nual growth that Pres­i­dent Don­ald Trump’s ad­min­is­tra­tion has said it can achieve.

Dur­ing the April-June quar­ter, the econ­omy is gen­er­ally thought to have grown at an an­nual rate of about 2.5 per­cent. The gov­ern­ment will of­fer a pre­lim­i­nary es­ti­mate of that fig­ure Fri­day.

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