No Fed rate increase, but no retreat from March hike — yet

January 28 04:38 2016

The Federal Reserve kept interest rates unchanged Wednesday and said it’s closely monitoring global economic and market turmoil, but gave no signal that it’s retreating yet from plans to raise rates gradually this year. An increase was not expected Wednesday after the Fed lifted its benchmark rate last month for the first time in nearly a decade — by a modest quarter-percentage point — and said it aims to nudge up the rate slowly the next few years amid tepid economic growth. The rate, which hovered near zero from the 2008 financial crisis to December, is still historically low at about 0.4%.Janet Yellen

Some analysts expected the Fed to hint that even a March hike had become less likely after this month’s troubling news about China’s slowdown, sharp fall in stock and oil prices, and concerns that the 6 ½ year-old U.S. recovery may be petering out. Adding to that mindset is that the cheap crude and a strengthening dollar have further pushed down meager inflation. In a statement after a two-day meeting, the Fed said it’s “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of the risks to the outlook.”

The comment suggests the Fed is taking a wait-and-see approach to the recent troubles, but isn’t yet backtracking from plans to gradually boost interest rates. Last month, the Fed provided a more upbeat view, saying the risks to its economic and labor market outlook were “balanced.” On Wednesday, it didn’t say risks had shifted to the downside but did note it’s keeping a close eye on the overseas troubles. Some economists expected the Fed to more clearly voice concerns that the international and market developments could crimp the U.S. economy. In September, for example, with China’s stumbles similarly rocking markets, the central bank said that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term.”

Such language in Wednesday’s statement likely would have indicated that a March rate increase was now a long shot, says Michael Gapen, chief U.S. economist of Barclays and a former Fed staffer. And that would have suggested the Fed may raise rates just twice in 2016 instead of the four quarter-point increases economists expected. Although some investment strategists were hoping for such a shift to re-ignite faltering stocks, Gapen noted the Fed’s bleaker outlook in September instead rattled markets by raising concerns about the economy’s health.

And while the Fed tempered its economic outlook Wednesday, it appeared to place more emphasis on a  labor market that has continued to churn out well over 200,000 jobs a month. Economic data “suggests that labor market conditions improved further as economic growth slowed late last year,” the Fed said. Many economists expect the government to report on Friday that the economy grew well under 1% at an annual rate in the fourth quarter, but they anticipate a rebound to a 2%-plus pace in the current quarter. Employers, meanwhile, have added an average 284,000 jobs a month since October. That Fed added that household spending and business have increased “at moderate rates in recent months,” a slight downgrade from its December description. It added that exports and business stockpiling slowed.

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