Fed Holds Rates Steady and Stays on Track for June Increase

WASHINGTON — The Federal Reserve held interest rates steady at the conclusion of its two-day policy meeting Wednesday and acknowledged rising inflation, but it gave little indication that officials are worried about a sudden, rapid escalation in prices or an abrupt slowdown in economic growth that could alter its gradual pace of rate increases.

The Federal Open Market Committee’s unanimous decision not to raise rates so quickly after a March increase had been widely expected. The official statement from the committee gave no indication that Fed officials plan to raise rates faster than previously telegraphed.

Officials made only a few changes to the language they had used after their March meeting to describe inflation and growth. Most notably, they acknowledged that “on a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent,” which is the central bank’s stated target for inflation.

The Fed is midway through what is meant to be a long and gradual push toward historically normal rates. It raised its benchmark interest rate in March to a range of 1.5 to 1.75 percent. Economic projections released at that meeting indicated that officials were split on whether they expected to raise rates a total of three or four times this year, with a narrow majority leaning toward three overall.

Economists overwhelmingly predict that the Fed will next raise rates in June, but after that, the consensus begins to break down. Some analysts say to expect four total rate increases this year given the strength of the economy, including a historically low unemployment rate.

Data released Monday showed that wages and prices are now growing at 2 percent a year, according to the Fed’s preferred inflation measure, the personal consumption expenditures price index. Excluding volatile food and energy prices, the rate is 1.9 percent. Those levels indicate inflation is finally reaching the 2 percent target after six years of failing to meet that goal.

Officials acknowledged that increase Wednesday, but the statement suggested that the Fed was not overwhelmingly concerned. The statement noted that annual inflation “is expected to run near the committee’s symmetric 2 percent objective over the medium term.” The inclusion of “symmetric” is a sign that the Fed could tolerate inflation running slightly above 2 percent for a period of time.

The language is a change from the March meeting statement, which said that inflation and core inflation rates “have continued to run below 2 percent” and that annual inflation is “expected to move up in coming months” and stabilize around 2 percent.

The statement Wednesday also eliminated a line from the March statement that said “the committee is monitoring inflation developments closely.”

“The Fed is telling markets that it won’t overreact to a run of higher numbers” in inflation readings, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note after the meeting, “just as it didn’t overreact to the run of five straight downside surprises last year.”

Several Fed officials have raised concerns in recent weeks about the economy’s “overheating” and publicly pondered whether the Fed may need to pour on some cold water with higher interest rates. The concern is that if the Fed does not raise interest rates quickly enough, wages and prices could begin to spiral up, forcing a sharp rate increase that could push the economy into recession.

If such a situation arises, “it’s very hard to navigate that without having an economic downturn,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview last month. “My concern is that’s much worse than just having slightly slower growth” from a slightly faster pace of rate increases.

Fed Chairman Jerome Powell and other officials are broadly optimistic about the strength of the economy but have noted some risks on the horizon for growth — most notably a potential drag from a trade dispute with other nations, like China. Some economists have also raised early concerns about slowing growth in Europe, which could affect the United States, and about other market metrics that could portend a slowdown, such as the rise in Treasury bond yields.

There were few hints of those concerns in this meeting’s statement.

The statement declared that “business fixed investment continued to grow strongly” since the last Fed meeting, which was more bullish language than the March statement. It noted, as it did in March, that household spending growth had moderated since the end of last year. It eliminated a line from the March statement that declared “the economic outlook has strengthened in recent months,” but did not add any new language about risks to growth. Officials said that “risks to the economic outlook appear roughly balanced,” a slight change from March, when they declared that “near-term risks” appeared roughly balanced.

Analysts read that as an endorsement of the economy’s staying power. “By not referring to the slower GDP growth in the first quarter or potential risks from trade policy, the committee is emphasizing that there are more signs of strength than weakness in the economy,” Ben Ayers, senior economist at the insurance firm Nationwide, wrote after the meeting.

The language in the statement, and the decision on rates, validated Fed watchers who had predicted few changes this month. In part, that’s because there haven’t been significant surprises in economic data since the last meeting.

“The FOMC notes boil down to ‘steady as she goes,'” said Robert Frick, corporate economist with Navy Federal Credit Union. “So, without the Fed trying to slow down the economy to head off a hot economy or rising inflation, we can expect the unemployment rate to continue dropping, and just as importantly, wages will be free to rise.”