Fed Holds Interest Rates Steady and Says Slow Growth Was Likely to Be ‘Transitory’

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But the Fed, in a statement issued Wednesday after a two-day meeting of its policy-making committee, said the engine still looks good even if the car moved a little more slowly.

Consumer spending, the bulk of economic activity, slowed in recent months, but the statement said that “the fundamentals underpinning the continued growth of consumption remain solid.”

So, too, for the broader economy. The Fed did not explain why it thought growth had slowed in the first quarter. It just said that it continues to expect the economy will expand at a moderate pace.

The Background

The statement was backed by a unanimous vote of the Fed’s policy-making committee, the Federal Open Market Committee. Internal debates have been subdued in recent months; most officials are in agreement on the economic outlook and the proper course of monetary policy.

The Federal Reserve has demonstrated increased confidence in the health of the economy in recent months, raising its benchmark interest rate in December and again in March. Many investors are anticipating another rate increase at the next meeting of the Fed’s policy-making committee, in June.

The steady decline of unemployment is the primary reason the Fed is on the move. The unemployment rate fell to 4.5 percent in March, the lowest level since 2007. (The government will release the April jobs report on Friday.)

The U.S. Unemployment Rate

The Fed’s benchmark interest rate remains at a low level that supports economic growth by encouraging borrowing and risk-taking. As the Fed raises rates, it reduces that incentive.

Most Fed officials have concluded that such a low level of unemployment is likely to put upward pressure on inflation, so they want to raise interest rates by the end of the year to a level that does not encourage or discourage growth.

Fed officials also were discussing the details and timing of ending a related stimulus program, the Fed’s vast investments in Treasuries and mortgage-backed securities. The Fed has indicated it could begin to reduce those holdings by the end of the year.

There are, however, some reasons for hesitation. Despite the Fed’s fears of future inflation, actual inflation remains stubbornly sluggish. The Fed’s preferred gauge of price pressures, the Commerce Department’s index of personal consumption expenditures excluding food and energy, rose just 1.6 percent over the 12 months ending in March. The Fed would like prices to rise at an annual pace of 2 percent.

Economic growth also remains tepid. The economy expanded at an annual rate of just 0.7 percent in the first quarter, according to a preliminary government estimate. There is some evidence the government has systematically underestimated first-quarter growth in recent years, but the trend remains around 2 percent.

Janet L. Yellen, the Fed’s chairwoman, said recently that the combination of rapid job growth and slow economic growth is “a big problem.” It appears to reflect the slow pace of improvement in the productivity of the average American worker.

That, however, is a problem the Fed cannot solve by holding down rates.

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Source: New York Times

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