The Federal Reserve's assessment of the U.S. economy was more upbeat than in April, when it said economic growth had slowed during the winter months, but its guidance of wanting to see further labor market improvement and higher inflation was unchanged.
Despite the upgraded view of the U.S. economy, Fed board members and bank presidents trimmed their forecast for growth this year to 1.8-2.0 percent from the March projection of 2.3-2.7 percent. The 2016 forecast was largely unchanged at 2.4-2.7 percent from 2.3-2.7 percent while the 2017 growth forecast was slightly higher at 2.1-2.5 percent versus March's 2.0-2.4 percent.
Members of the Fed's policy-making body, the Federal Open Market Committee (FOMC), also maintained their view of when the Fed should start raising its fed funds rate, which has been unchanged at 0 - 0.25 percent since the depth of the global financial crises in December 2008.
As in March, 15 members of the FOMC wanted to raise the funds rate this year while two members wanted the rate raised in 2016.
The median estimate for the fed funds rate was also steady from March at 0.625 percent by the end of 2015, implying two rate increases this year assuming rates are raised by 25 basis points.
For 2016 the median estimate was cut to 1.625 percent from 1.875 percent though three FOMC members now see the rate above 3 percent while no one saw the rate above 3 percent in March.
While the U.S. unemployment rate has been falling steadily since a peak of 10 percent in October 2009, it rose slightly to 5.5 percent in May from 5.4 percent in April. Wage growth rebounded in April to an annual rise of 4.55 percent after slipping for three months in a row from December's 5.74 percent to 4.1 percent in March.
U.S. Gross Domestic Product contracted by 0.70 percent in the first quarter from the fourth quarter as economic activity stalled during harsh winter weather. On an annual basis, growth was 2.7 percent up from 2.4 percent in the fourth quarter.
Headline inflation was negative 0.2 percent in April, the fourth month in a row of nil change or deflation while the core inflation rate was steady at 1.8 percent in April from March.
The Federal Open Market Committee issued the following statement:
"Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams."