No rate in­crease by Fed

Cen­tral bank will mon­i­tor how­global pres­sures a≠ ect the U. S. econ­omy

The Denver Post - - BUSINESS - By Martin Crutsinger

The Fed­eral Re­serve sounded a note of con­cern Wed­nes­day about how global pres­sures could af­fect the U. S. econ­omy, while keep­ing a key in­ter­est rate un­changed.

Sixweeks af­ter it raised rates from record lows, the Fed took stock of a more per­ilous in­ter­na­tional pic­ture that could al­ter its plans for fur­ther rais­ing rates. The state­ment it is­sued af­ter its lat­est pol­icy meet­ing sig­naled that it­might con­sider slow­ing fu­ture rate hikes if mar­ket losses and glob­al­weak­ness don’t abate.

But the Fed did not com­mit to slow­ing its pace of rate in­creases, and stock in­vestors ap­peared dis­ap­pointed. The Dow Jones in­dus­trial av­er­age closed down about 223 points, or 1.4 per­cent. The Dow had been up slightly be­fore the Fed is­sued its state­ment.

S& P Cap­i­tal IQ strate­gist Sam Sto­vall said in­vestors had been hop­ing for a “clear sig­nal” that the Fed would raise rates­more grad­u­ally for the rest of 2016 and felt dis­cour­aged when they didn’t get it.

Many point to the Fed’sDe­cem­ber rate hike as a key fac­tor in the stock mar­ket’s tum­ble in re­cent weeks. The­move amounted to only a small rise in the Fed’s still- ex­tremely low tar­get rate for overnight bank lend­ing. But it sig­naled that a seven- year pe­riod of near- zero rates was end­ing and that while bor­row­ing costs wouldn’t be ris­ing fast, they would be headed up.

The Fed’s new­state­ment said it is study­ing “global eco­nomic and fi­nan­cial de­vel­op­ments and is as­sess­ing their­im­pli­ca­tions for the la­bor mar­ket and in­fla­tion.”

“This is in­tended to lull us into lower ex­pec­ta­tions as to when the next move is go­ing to come,” said Pa­trick O’Keefe, di­rec­tor of eco­nomic re­search at the con­sult­ing firm CohnReznick.

Since the Fed raised ratesDec. 16, stocks have plunged, oil prices have skid­ded and China’s lead­ers have strug­gled to man­age a slow­down in theworld’s se­cond- big­gest econ­omy.

Some econ­o­mists say they now ex­pect just twom­od­est Fed rate in­creases dur­ing 2016, rather than the three or four they had fore­seen when the year be­gan.

The Fed’s sig­nal in De­cem­ber that it would raise rates four times this year “has be­come less plau­si­ble as we’ve got­ten a lit­tle bit into the year,” O’Keefe said. “Re­al­ity has re­fused to co­op­er­ate.”

In a key change to the state­ment, the Fed dropped lan­guage it had used in De­cem­ber that it was “rea­son­ably con­fi­dent” that in­fla­tion­would reach the Fed’s 2 per­cent tar­get over the next fewyears.

By drop­ping this lan­guage, the Fed ap­peared to sig­nal con­cern that in­fla­tion has fallen fur­ther as a re­sult of a drop in oil prices and a stronger dol­lar. Chair Janet Yellen and other Fed of­fi­cials have stressed the im­por­tance of higher in­fla­tion. A key in­fla­tion gauge has run below the 2 per­cent tar­get for more than three years.

The Fed’s pol­i­cy­mak­ers left their bench­mark rate un­changed in a range of 0.25 per­cent to 0.5 per­cent. For seven years un­til De­cem­ber, they had kept that rate at record lows near zero.

“It was very non­com­mit­tal,” North­ern Trust econ­o­mist Asha Ban­ga­lore said of the Fed’s state­ment.

Still, the changes the Fed made in de­scrib­ing eco­nomic con­di­tions sig­naled that it might be pre­pared to slow­its credit tight­en­ing un­til it sees more ev­i­dence that the mar­kets and the econ­omy are sta­bi­liz­ing.

The De­cem­ber state­ment had said the econ­omy was ex­pand­ing at a “mod­er­ate pace.” The new state­ment notes that “growth slowed late last year.”

The pre­vi­ous state­ment also de­scribed risks to the out­look as “bal­anced.” That de­scrip­tion was dropped Wed­nes­day. In its place, the Fed in­serted its con­cern about global eco­nomic and fi­nan­cial de­vel­op­ments.

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