Fed leaves key rate unchanged at a time of uncertainty

The statement offered a slightly more upbeat tone than it did after the Fed’s previous meeting in December, reflecting rising confidence in the economy and signs that chronically low inflation is moving higher.

In January, a measure of consumer confidence shot up to the highest level in more than 15 years, the Conference Board has reported. And a measure of small business confidence has reached its highest point since 2004, according to the National Federation of Independent Business.

In its statement, the Fed said flatly that inflation “will rise to 2 per cent over the medium term.” Previously, it had said only that inflation was “expected” to rise to 2 per cent.

But none of the revisions to the statement appeared to hint that a rate hike could be coming as soon as the Fed’s next meeting in March. If the Fed does want to signal investors of a forthcoming rate increase, it can use Chair Janet Yellen’s semiannual testimony on interest-rate policy to Congress on Feb. 14-15 to do so.

Some economists said they still think a rate hike as soon as March is possible — if details of Trump’s economic plan become clearer by then and if the job market continues to show strength.

“We view this statement as a very small nudge towards the next rate hike, but action in March will come only if the next two labour market reports are strong and we have a clear idea of the likely extent and timing of fiscal easing,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The Fed statement was approved 10-0. The panel’s voting membership among regional bank presidents rotates each January, and two members who dissented at times in 2016 in favour of faster rate increases do not have votes this year.

The statement was not accompanied by updates to the Fed’s economic forecasts or by a news conference with Yellen, both of which occur four times a year.

Last month, the Fed modestly raised its benchmark short-term rate for the first time since December 2015, when it had raised it after keeping the rate at a record low near zero for seven years. The Fed had driven down its key rate to help rescue the banking system and energize the economy after the 2008 financial crisis and the Great Recession.

When it raised rates last month, the Fed indicated that it expected to do so three more times in 2017. Yet confusion and a lack of details over what exactly Trump’s stimulus program will look like, whether he will succeed in getting it through Congress and what impact it might have on the economy have muddied the outlook.

And while Trump’s tax and spending plans are raising hopes for faster growth, his combative approach to trade relationships with such countries as China and Mexico could slow the economy if U.S. trading partners retaliate and collectively impede the flow of imports and exports.

Nariman Behravesh, chief economist at IHS Markit, predicts that the economy will grow a modest 2 per cent to 2.5 per cent this year, before accelerating next year to 2.6 per cent to 2.7 per cent on the assumption that Trump’s policy proposals will have begun to take full effect by then.

The outlook for both years would mark an improvement over the economy’s lacklustre growth of 1.6 per cent in 2016, its weakest performance since 2011.

Even though economic growth, as measured by the gross domestic product, was underwhelming last year, the job market appears close to full health. Hiring was consistently solid in 2016, and the unemployment rate ended the year at 4.7 per cent, just below the 4.8 per cent level the Fed has identified as representing full employment.

And inflation, by the Fed’s preferred measure, rose 1.6 per cent in the 12 months that ended in December, moving closer to the Fed’s 2 per cent goal.

American manufacturing has been showing tentative signs of a comeback. Factories grew last month at the fastest pace in more than two years.

Manufacturing has been expanding despite a strong U.S. dollar, which makes American products more expensive in overseas markets. Last month, businesses increased their investment in industrial machinery, semiconductors and other high-cost items.

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AP Economics Writer Christopher S. Rugaber contributed to this report.

Martin Crutsinger, The Associated Press

by Canadian Press

Fed leaves key rate unchanged at a time of uncertainty

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