Fed opts not to raise key interest rate

Federal Reserve Chair Janet Yellen speaks during a news conference after the Federal Open Market Committee meeting in Washington, Wednesday, March 16, 2016.
Federal Reserve Chair Janet Yellen speaks during a news conference after the Federal Open Market Committee meeting in Washington, Wednesday, March 16, 2016.

WASHINGTON -- The Federal Reserve decided Wednesday to keep a key interest rate unchanged in light of global pressures that risk slowing the U.S. economy.

Fed officials also said they expect to raise rates more gradually this year than they had envisioned in December. Most Fed officials now expect to raise the benchmark rate by half a percentage point this year, according to an aggregation of their forecasts that the Fed published Wednesday.

The Fed entered the year planning to raise its benchmark rate by about 1 percentage point, most likely in four quarter-point increments. Officials backed away from those plans after financial conditions tightened in January amid concerns about the health of the global economy.

"The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen," the statement from the Federal Open Market Committee said. "However, global economic and financial developments continue to pose risks."

Offsetting the threats, the Fed said in the statement after a policy meeting that it foresees a further strengthening in the U.S. job market. It also expects inflation, which has stayed persistently low, to reach the Fed's 2 percent target in two to three years.

Changes in the federal funds rate are the Fed's primary lever for influencing the economy. The benchmark rate directly influences other short-term rates, such as the prime rate and credit card rates.

However, the Fed's bigger influence on the economy flows from its monetary policy's effects on long-term borrowing costs, such as rates on mortgages and corporate debt. Those interest rates affect the prices of stocks, bonds, real estate and other assets. Long-term rates are based on financial markets' expectations of the path of short-term rates over time.

Stock investors seemed pleased by the Fed's expectation of a more gradual pace of rate increases. The Dow Jones industrial average, which had been up modestly before the Fed's statement was issued, jumped more than 100 points soon after, before settling slightly lower.

"The tone of the FOMC statement and accompanying economic projections was dovish," Neil Dutta, head U.S. economist at Renaissance Macro Research in New York, said in a research note. The reference to global risks "pushes the Fed in the role of the world's central bank. In this role, the Fed needs to let inflation in the U.S. surge to offset disinflation in the rest of the world."

Since raising its key rate from a record low in December, the Fed has held off on raising rates again in the face of market jitters and a sharp slowdown in China's economy.

Resuming its rate increases too soon could slow growth or rattle investors again. This week, the government said retail sales slipped in February and that Americans spent less in January than it had previously estimated. The report suggested that consumers remained cautious about spending despite a solid job market and lower gas prices.

The Fed's decision was approved 9-1, with Esther George, president of the Fed's Kansas City regional branch, dissenting. The statement said George favored a quarter-point rate increase.

In its updated forecasts, the Fed revised its outlook to show two rate increases this year. The forecast is based on responses from all 17 Fed officials who participate in the discussions, not just the 10 officials who vote at each meeting.

In a nod to the financial market turbulence that hit in the beginning of the year over concerns about falling oil prices and weakness in China, the Fed statement said, "Global economic and financial developments continue to pose risks."

It noted that "inflation picked up in recent months" but remained below the Fed's desired 2 percent target. It said prices were being kept low by the "transitory effects" of lower prices for energy, and imports, which are cheaper because of a strong dollar.

The Fed has two mandates: To maximize employment and to keep prices stable. It has essentially met just one: In February, the United States added a robust 242,000 jobs -- roughly the monthly average for the past six months. And the unemployment rate is a low 4.9 percent, close to the rate the Fed associates with full employment.

But inflation has been stuck below the Fed's 2 percent target rate for nearly four years. Too-low inflation tends to lead people to postpone purchases, which slows consumer spending, the economy's main fuel. Subpar inflation also makes the inflation-adjusted cost of loans more expensive.

Before further raising rates, the Fed wants to see more evidence that inflation is picking up. Its preferred inflation gauge rose in January to a 12-month increase of 1.3 percent, faster than the scant 0.7 rise over the 12-month period that ended in December. But that's still well below the Fed's target.

The government reported Wednesday that core consumer prices -- which exclude volatile food and energy costs -- ticked up for a second straight month. Over the past 12 months, while overall consumer inflation has risen only 1 percent, core inflation has increased 2.3 percent, the sharpest 12-month increase since 2012.

Recent comments from Fed officials indicate that they differ on how to interpret inflation prospects.

Vice Chairman Stanley Fischer said last week that the Fed may "be seeing the first stirrings of an increase in the inflation rate -- something that we would like to see."

Fischer suggested that two factors that have been depressing inflation -- lower oil prices and a strong dollar, which reduces import prices -- may be starting to wane.

But another Fed board member, Lael Brainard, said last week that she saw "troubling indications" that inflation could dip again. She also said she worried that weakness in China, Japan and other places could slow the U.S. economy.

Federal Reserve officials are still waiting for cheaper oil and gas to boost consumer spending and perk up the economy.

At a news conference Wednesday, Fed Chairman Janet Yellen said the typical U.S. household will have roughly $1,000 more to spend this year thanks to lower prices at the pump. Gas prices average $1.96 a gallon nationwide, 46 cents lower than a year ago.

Economists have been anticipating for months that lower gas costs would boost consumer spending on other items and accelerate the economy's growth. But Americans have remained cautious, pocketing much of the savings or using it to pay down debt.

Yellen suggested that it may take time for households to digest the lower prices and change their behavior. Consumer spending "could slowly strengthen over time," she said.

Information for this article was contributed by Martin Crutsinger of The Associated Press; Jana Radnow of Bloomberg News; and Binyamin Appelbaum of The New York Times.

Business on 03/17/2016

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