Federal Reserve chairwoman Janet Yellen announced Wednesday that the Federal Open Market Committee won’t raise interest rates this month due to an uncertain economic future across the globe.
Binyamin Appelbaum of The New York Times had the news:
The Fed said on Wednesday, after a two-day meeting of its policy-making committee, that it would not raise its benchmark interest rate, and that future increases were most likely to unfold at a slower pace.
The seven-year period since the end of the Great Recession has become one of the longest economic expansions in American history and, at the same time, one of the most disappointing. The Fed, in a statement announcing its decision, noted what had become a typical mix of good news and bad.
Economic output has increased while job growth has slowed, the Fed said. Consumers are spending more while companies are making fewer investments. Exports are rebounding, but Britain’s June 23 referendum on whether to leave the European Union could set off another round of disruptions.
“Recent economic indicators have been mixed, suggesting that our cautious approach to adjusting monetary policy remains appropriate,” the Fed chairwoman, Janet L. Yellen, told a news conference.
Howard Schneider of Reuters writes that the Fed is faced with a difficult situation:
Though difficult to pinpoint, estimates of the neutral rate provide a key yardstick to gauge whether a given federal funds level is stimulating or restricting the economy.
With the Fed still trying to encourage spending, investment and hiring, a low neutral rate means the Fed has less room to move before that stimulus is gone.
Fed estimates published online show little consistent movement in the neutral rate in recent years even as the labor market tightened and growth continued above trend, confounding expectations that it would move higher in an economy expanding beyond potential.
Officials cite a variety of possible explanations, but the result is the same: until policymakers are satisfied that the neutral rate is moving higher, they face an effective cap of 2 percent or even less on the federal funds rate.
Coupled with a 2 percent inflation rate, the Fed’s target, that would put the “real” federal funds rate at zero. If inflation remains below target, the ceiling on the Fed would be that much lower as well.
Greg Robb of MarketWatch.com reported that the U.S. economy remains strong:
In the nearer term, the Fed statement noted a mix of good and bad news on the economy. On the downside, Fed officials noted that job gains had diminished, business fixed investment had been “soft” and market measures of inflation had declined.
Growth in economic activity, on the other hand, “appears to have picked up” from the tepid first quarter. Consumer spending and housing were improving and weakness from foreign trade looked like it might be over.
Yellen said the Fed would closely monitor the June employment report, due in early July, for evidence that hiring has rebounded after a surprising slowdown in May and April. Many economists believe a strong jobs report could be a springboard for an interest-rate increase at the Fed’s next meeting in July.
The Fed’s statement and projections, however, did not appear to set the stage for a July rate hike. For now, investors are putting their bet on a move in September, or even later.
