Federal Reserve Leaves Rates Unchanged
Posted January 31, 2018 7:50 p.m. EST
WASHINGTON — The Federal Reserve said on Wednesday that it was still trying to stimulate faster economic growth as one of the longest expansions in American history neared the end of its ninth year.
The Fed said after a two-day meeting of its policymaking committee that it was leaving its benchmark interest rate unchanged in a range of 1.25 percent to 1.5 percent, a relatively low level that the Fed said would help support continued job growth and stronger inflation.
The Fed’s economic outlook remained relatively upbeat, setting the stage for a rate hike at its next meeting in March. But the decision to hold steady in January, while widely expected, underscored that the Fed still regards the economic expansion as fragile and in need of assistance.
The announcement brought down the curtain on Janet L. Yellen’s four-year tenure as the Fed’s chairwoman. She will step down on Saturday at the end of her term. The Fed said that her successor, Jerome H. Powell, a Fed governor since 2012, would take the oath of office on Monday morning.
The economy grew 2.3 percent in 2017, extending a prolonged period of unusually stable growth. And economic forecasters, including most Fed officials, expect somewhat faster growth this year, partly as a result of the $1.5 trillion in tax cuts that went into effect in January.
The Fed said the economy is growing at a “solid rate” and the labor market continues to improve.
The assessment “is about as strong a characterization of the domestic economy as the committee has had during the current recovery,” said Michael Gapen, chief U.S. economist at Barclays. He said it was a “strong signal” that the Fed is planning to raise its benchmark rate in March.
A measure derived from asset prices, which tend to rise with the Fed’s benchmark rate, implied about a 78 percent chance of a March rate increase on Wednesday, according to CME Group, up from about 71 percent before the Fed released its statement.
The unemployment rate stood at 4.1 percent in December, and Fed officials do not expect it to fall much further. Instead, as growth continues, they expect inflation to begin rising more quickly.
But Fed officials are still committed to moving slowly. Growth, while steady, remains weak by historical standards, and although unemployment is quite low, wage growth remains sluggish, too.
“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation,” the Fed said in the postmeeting statement.
The announcement made little impression on financial markets because it left the Fed’s plans unchanged. The Standard & Poor’s 500-stock index rose 0.05 percent on the day to close at 2,823.21. The yield on the benchmark 10-year Treasury, which has climbed over the last few months on market expectations of stronger growth and inflation, closed at 2.7 percent, down 0.02 points on the day.
Much of the economic strengthening happened under Yellen’s leadership, a period during which the Fed extended the economic stimulus campaign it began after the 2008 financial crisis. While critics warned that the Fed had exhausted its ability to improve economic conditions, and would instead unleash inflation, Yellen convinced her fellow Fed officials that the economy had room to grow, and events proved her right.
On Wednesday, some Fed employees wore shirts or jackets with the collars turned up, or popped, in a tribute to Yellen, who favored that look in public appearances.
Powell, a Republican with a background in investment banking, consistently voted in favor of Yellen’s policies as a member of the Fed’s board, and said during the confirmation process that he intends to continue the gradual unwinding of the stimulus campaign.
The next meeting of the policymaking committee is scheduled for March 20 and 21. If the Fed raises rates, it would be the sixth consecutive quarterly tightening of monetary policy.
“For a while now, the Fed has been very predictable in the face of a pretty benign environment,” said Luke Bartholomew, an investment strategist at Aberdeen Standard Investments.
The risk, he said, is that the $1.5 trillion tax cut that began to take effect this month will produce faster growth and inflation, forcing the Fed to consider increasing rates more quickly.
Most Fed officials predicted in December that the Fed would raise rates at least three times in 2018. Some analysts predict a fourth increase, citing a strengthening economic outlook.
There are countervailing pressures. Inflation remains low despite the Fed’s repeated predictions that faster inflation is around the corner. The Fed’s statement suggested that officials are gaining confidence in that prediction, saying they expect inflation to gain strength this year.
“Everything from stronger growth at home and abroad to debt-financed tax cuts have raised expectations for inflation,” said Diane Swonk, chief economist at Grant Thornton. The value of financial assets, on the other hand, continues to soar as investors have shaken off the rate increases, keeping borrowing costs low and creating pressure for the Fed to move more quickly.
Alan Greenspan, the former Federal Reserve chairman, stirred financial markets on Wednesday by telling Bloomberg Television that investors had become irrationally exuberant.
“There are two bubbles: We have a stock market bubble and we have a bond market bubble,” Greenspan said. But he did not predict an imminent correction. “At the end of the day, the bond market bubble will eventually be the critical issue, but for the short term, it’s not too bad,” he said.
So far, Fed officials have played down the importance of both factors, insisting that they are focused on raising rates slowly as the labor market tightens.
Swonk noted that the Fed had demonstrated little ability to constrain financial markets without causing broader economic damage.
Powell, she said, “will be reluctant to voice publicly the concerns that he and his colleagues have about the froth in financial markets.”
She added, “Previous attempts by the Fed to jawbone financial markets into place have failed.”
Powell may make his public debut as the Fed’s chairman in mid-February, when the House and Senate hold hearings on monetary policy twice a year. The dates have not been announced, but the testimony will offer Powell a first chance to calibrate expectations for his tenure.