Wednesday, May 3, 2017

US Fed holds rates, says growth slowdown 'transitory'

    The Federal Reserve left its benchmark federal funds rate at 0.75 - 1.0 percent, as widely expected, and signaled it still expects to raise the rate another two times this year as it said slower economic growth in the first quarter was "likely to be transitory" and economic activity will continue to expand at a moderate pace with gradual changes to its monetary policy stance.
     The U.S. central bank, which raised its rate by 25 basis points in March and forecast the rate would rise to 1.4 percent during the year, added the labor market had continued to strengthen even as growth slowed, with solid fundamentals underpinning growing consumption and investments by businesses firming.
     The Fed, which targets inflation as well as unemployment, also said inflation had been running close to its 2.0 percent objective although consumer prices, excluding energy and food, were somewhat below 2 percent.
     The Fed's decision was expected after the economy slowed to annualized growth of only 0.7 percent in the first quarter of this year, down from 2.1 percent in the fourth quarter and below expectations of 1.1 percent. The deceleration was mainly due to weak consumption from lower auto sales and low home-heating bills from warm weather.
     The U.S. unemployment rate fell to a lower-than-expected 4.5 percent in March from 4.7 percent in February for the lowest rate since May 2007.
     The headline inflation rate eased to 2.4 percent in March from 2.7 percent while the core inflation rate dropped to 2.0 percent from 2.2 percent.
    "Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed," the Fed said.
    The Fed maintained its view that the risks to its economic outlook were roughly balanced and it still expects economic conditions to warrant gradual increases in the fed funds rate, although it is likely to remain below its longer-run level for some time.
    In March the Fed forecast 2.1 percent economic growth this year, 2.1 percent in 2018 and 1.9 percent in 2019. The unemployment rate was seen averaging 4.5 percent this year and in 2018 and 2019 while inflation, as measured by the personal consumption expenditure, was seen at 1.9 percent this year and 2.0 percent in the following two years.
    The fed funds rate was projected to reach 1.4 percent at the end of this year, then 2.1 percent end-2018 and 3.0 percent at the end of 2019.
    The FOMC, the Fed's policy-making arm, was unanimous in today's decision in contrast to March when one member voted to keep the rate while the other nine members agree to raise the rate.
     In its statement, the FOMC reiterated that it was continuing to reinvest proceeds from its holding of debt, mortgage-backed securities and Treasuries, and expects to continue with this process "until normalization of the level of the federal funds rate is well under way."
     Howeverminutes from the FOMC's March meeting showed that discussions are under way on how and when to begin the process of shrinking the Fed's $4.5 trillion balance sheet. 
    The assets were purchased by the Fed during three rounds of large-scale asset purchases, known as quantitative easing, to push down long-term borrowing rates in the wake of the global financial crises when short-term rates were slashed to effectively zero.
     In light of an improving economy and falling unemployment, the Fed began tightening its policy stance in December 2015 and has raised its rate three times since then by a total of 75 basis points, with the most recent hike in March.

The Board of Governors of the Federal Reserve System issued the following statement:

"Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Job gains were solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee's 2 percent longer-run objective. Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to 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 will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
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, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell."


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