Keeping a tight lid on its future intentions, the U.S. Federal Reserve on Wednesday held interest rates steady at zero and provided only faint clues about when the first hike in nine years might occur.
Adhering to market expectations, the Fed’s Open Market Committee voted essentially to maintain the status quo that has prevailed since the U.S. central bank first went to zero rates in late-2008.
FOMC members deemed economic activity “expanding moderately” with various sectors seeing some activity. The language, though, was tempered and the various indicators the Fed uses to tip its hand on policy showed little movement.
Market participants were looking toward the rest of the committee’s report, which included economic projections and the so-called dot plot that diagrams individual members’ expectations for the future path of rate hikes.
Traders initially took the remarks in a dovish sense, with the Dow industrials turning mildly positive after being down 25 points or so prior to the release. Bond yields edged lower, with the 10-year Treasury note trading around 2.35 percent.
The FOMC move comes as unemployment continues to drop but inflation shows almost no signs of getting to the Fed’s target rate of 2 percent. The jobless rate has fallen to 5.5 percent but most inflation measures are moored in the 1 percent to 2 percent range, with low wage pressures, energy prices well below their year-ago levels and the gross domestic product in check.
Traders for months had been expecting the Fed to move at the June meeting. Now, the likelihood is for September at the earliest, with Chicago Mercantile Exchange trading indicating a higher probability in December.
“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the statement said in language that has become common to Fed statements.
The economy thus far has fallen well short of 3 percent growth expectations. GDP actually contracted 0.7 percent in the first quarter and, according to the Atlanta Fed, is likely to rise only about 1.9 percent in the second quarter.
That’s created a dilemma for the Fed, which would like to normalize policy but fears disrupting a still-fragile recovery.
Source: CNBC
