US Federal Reserve keeps rates flat but hints at one more increase by year’s end
US central bank said portfolio drawdown to start in October
The US Federal Reserve left interest rates unchanged on Wednesday but signalled it still expects one more increase by the end of the year despite recent weak inflation readings.
New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the “appropriate” level for the federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25 per cent and 1.50 per cent by the end of 2017.
That is one-quarter of a point above the current level. Financial markets were barely moved by the Fed decision and the new economic projections and based on the immediate market reaction it looked as if the Fed was right when it said that the portfolio run-off would be as exciting as “watching paint dry”.
“The labour market has continued to strengthen, economic activity has been rising moderately so far this year,” the Fed said in its policy statement. It added that the near-term risks to the economic outlook remained “roughly balanced” but that inflation was being watched “closely.”
The interest rate outlook for next year remained largely unchanged, with three hikes envisioned. But the US central bank slowed the pace of projected monetary tightening from there.
It forecasts only two increases in 2019 and one in 2020. It also lowered again its estimated long-term “neutral” interest rate from 3.0 per cent to 2.75 per cent, reflecting concerns about overall economic vitality.
The Fed, as expected, also said it would begin in October to reduce its approximately US$4.2 trillion in holdings of US Treasury bonds and mortgage-backed securities by initially cutting up to US$10 billion each month from the amount of maturing securities it reinvests.
That action will start a gradual reversal of the three rounds of quantitative easing the Fed pursued between 2008 and 2014 to stimulate the economy after the 2007-2009 financial crisis and recession.
The limit on reinvestment is expected to increase by US$10 billion every three months to a maximum of US$50 billion per month until the central bank’s overall balance sheet falls by perhaps US$1 trillion or more in the coming years.
The policy statement and accompanying projections showed the Fed still in the middle of a balancing act between an economic recovery that has kept US unemployment low and is gaining steam globally and a recent worrying drop in US inflation.
Three of the hawkish policymakers appeared to move their expected policy rate down to account for only one more hike by the end of 2017, leaving a core 11 clustered around a likely December increase. The Fed has raised rates twice this year.
The Fed noted that the recent hurricanes in the United States would affect economic activity but are “unlikely to materially alter the course of the national economy over the medium term.”
Forecasts for economic growth and unemployment into 2018 and beyond were largely unchanged. Gross domestic product is now expected to grow at a rate of 2.4 per cent this year, 2.1 per cent next year and 2.0 per cent in 2019.
The unemployment rate is forecast to remain at 4.3 per cent this year before falling to 4.1 per cent next year and remaining there in 2019.
Inflation is expected to remain under the Fed’s 2 per cent target through 2018 before hitting it in 2019.
There were no dissents in the Fed’s policy decision.