US Federal Reserve taking it slow on rates
The Federal Reserve has reiterated that it will be “patient” in raising interest rates from record lows even as the US economy moves steadily closer to full health.
The Fed signalled in a statement after its latest policy meeting that no rate increase is imminent despite the economic gains. A key reason is that inflation remains well below the Fed’s target rate.
And it said the pressures holding down inflation – mainly plunging oil prices - have intensified. The Fed said it thinks inflation will decline further before eventually reaching the central bank’s 2% target rate.
Yet the Fed sketched a brightening picture of the economy – with a strengthening job market, lower unemployment, rising consumer spending and higher household purchasing power fuelled by lower energy prices.
Paul Ashworth, an economist at Capital Economics, said the statement suggests that the Fed “is still taking the view that the collapse in oil prices is a net positive for the economy”.
The statement also made clear that policymakers still think the impact of low oil prices on inflation will be temporary, Mr Ashworth said
The statement was approved on a 10-0 vote.
The Fed’s emphasis on low inflation could affect when it decides to raise its key short-term rate from near zero. Many economists have forecast a rate hike in June, but some have pushed back their predicted timetable.
The Fed’s statement did not explicitly mention the weakening global economy. But it did say the Fed planned to take “international developments” into account in determining when to start raising rates.
The Fed operates with two major goals – maximising employment while keeping prices rising at a moderate pace of 2%.
The US economy’s steady growth and a strengthening job market would normally argue for a move to begin raising rates to prevent high inflation. The Fed has kept its benchmark rate near zero since December 2008 to encourage borrowing, spending and investment and support the economy’s recovery from the Great Recession. Its key rate affects rates on many consumer and business loans.
But the concerns about global economic weakness and low inflation have raised doubts about when the Fed’s first rate increase will occur. A growing number of economists say the date could slip to September or even later. Economists at Morgan Stanley this week pushed back their forecast for the first rake hike to March 2016 because of the factors holding inflation down.
If the Fed wants to signal that a rate hike is coming in June, it would need to alter the “patient” wording at its next meeting in mid-March
A complicating factor is the European Central Bank’s new plan to flood its sputtering economy with more than 1 trillion euros. That money should keep the eurozone’s interest rates ultra-low and could lead some investors to buy higher-yielding US Treasurys. That would further strengthen the dollar and could push US inflation further below the Fed’s 2% target.
Growth in China, the world’s second largest economy, is slowing, too.
By contrast, the US economy added nearly 3 million jobs last year, enough to cut the unemployment rate to 5.6%. That is just above the Fed’s goal of 5.2% to 5.5% unemployment.
But Fed chief Janet Yellen and other officials have pointed to other factors - such as weak pay growth and a still-high number of part-time workers who cannot find full-time jobs – as evidence that more must be done to achieve a healthy job market.
US prices rose just 1.2% in the 12 months that ended in November, according to the Fed’s preferred gauge of inflation. When inflation is too low, consumer spending – and economic growth – can slow as people delay purchases on the assumption that the same or lower prices will be available later.
The biggest fear is deflation – a broad decline in prices and income that can further restrain spending and even tip an economy into recession.
