Fed holds steady on rates as economy strengthens

Fed holds steady on rates as economy strengthens
© Stefani Reynolds

The Federal Reserve on Wednesday announced it would keep interest rates unchanged as inflation remains low despite a burst of economic activity during the first quarter of 2019.

The central bank’s Federal Open Markets Committee (FOMC), which sets monetary policy, was widely expected to hold the federal funds rate at a 2.25 to 2.5 percent range. The lack of action keeps in place a pause on interest rate hikes initiated by the central bank in January. 

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Top Fed officials, including Chairman Jerome Powell, have said throughout the year that the bank will be “patient” with rate adjustments as the U.S. economy remains strong despite concerns of a global slowdown.  

"In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes," the FOMC said in a Wednesday statement

The Fed chairman has had to walk a fine line as he faces barbs from all sides. His stewardship of interest rates and the nation's economy have been questioned, especially by President TrumpDonald John TrumpTrump says he doesn't want NYT in the White House Veterans group backs lawsuits to halt Trump's use of military funding for border wall Schiff punches back after GOP censure resolution fails MORE, who has also fought to reshape the central bank.

Since the last rate decision, Trump has also pushed to shake up the bank, floating Herman Cain and conservative economist Stephen MooreStephen MooreTop economic adviser warned Trump on reelection chances ahead of China truce: report Nancy Pelosi's gut-check moment on trade and the USMCA Trump adviser: 'He should stop saying things that are untrue' MORE for the Board of Governors. Cain withdrew after it became clear he lacked Senate support, and Moore's bid looks increasingly shaky over past controversial remarks.

Powell and the Fed were fiercely criticized by Wall Street and Trump for raising rates in December as the economy slumped and financial markets dropped sharply. The economy has since rebounded, but the FOMC has all but formally ruled out a rate hike this year.

“We think our monetary policy stance is in a good place and we are going to be patient," Powell said Thursday. "We don’t feel like the data is pushing us in either direction."

The Fed raised interest rates seven times over the past two years in a bid to stave off inflation as the economy expanded.

Unemployment remains close to record lows at 3.8 percent as of March, and the economy added an average of 180,000 jobs in the first three months of 2019.

U.S. gross domestic product also grew at an annual rate of 3.2 percent in the first three months of the year, according to federal data released last week. And the Commerce Department on Monday said consumer spending in March rose at the highest rate in close to a decade.

Even so, inflation has lingered well below its target range of 2 percent, with core consumer goods prices only rising 1.6 percent in the past 12 months.

Powell said that declining inflation was "not expected" but is likely due to "transitory" factors such as notable drops in asset management fees, apparel prices and airfare. He added that the decline would not change the Fed's expectation that inflation will move toward the 2 percent target.

As inflation remains well below the Fed’s target range, Trump has called on the bank to cut interest rates and renew recession-era stimulus to maximize economic growth.

Trump criticized the Fed on Tuesday in a pair of tweets bashing the bank for hiking rates despite low inflation. He also slammed the Fed for gradually selling off billions of dollars in bonds purchased during the financial crisis, reversing efforts to stimulate the economy.

“Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening,” Trump tweeted, referring to the central bank's efforts to cut its debt holdings. The Fed's moves to sell bonds purchased during the crisis has the effect of pulling money out of the economy, potentially tightening financial conditions.

Trump added that the economy had the potential to “go up like a rocket” if the Fed began another round of “quantitative easing,” purchasing more bonds to stimulate the economy.

“Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!” Trump tweeted.

The persistence of low inflation despite strong economic growth and record low unemployment has prompted the Fed to reconsider several of the metrics it leans on to guide interest rate policy.

While the Fed is highly unlikely to renew recession-era stimulus, the bank may opt to cut rates later this year if inflation remains low, analysts say.

Powell said that the economy was in good shape despite a slowdown in household spending and business investment growth. He added that global risks to the U.S. economy, including a potential recession in Europe and China, trade tensions, and a mess Brexit, "have moderated somewhat" since March.

Powell declined to preview a potential rate cut, but said the Fed could adjust policy if inflation fails to climb toward the target range.

Updated at 3:24 p.m.