Federal Reserve leaves US interest rates unchanged

US officials grappling with change of direction since Trump election

The Fed said it still expects it will need only gradual rate increases. Photograph: AFP

The Fed said it still expects it will need only gradual rate increases. Photograph: AFP

 

Federal Reserve officials left interest rates unchanged while acknowledging rising confidence among consumers and businesses following Donald Trump’s election victory.

“Measures of consumer and business sentiment have improved of late,” the Federal Open Market Committee said in its statement on Wednesday following a two-day meeting in Washington. Policymakers reiterated their expectations for moderate economic growth, “some further strengthening” in the labour market and a return to 2 per cent inflation.

The Fed provided little direction on when it might next raise borrowing costs, as officials grapple with the uncertainty created by a new presidential administration. Policymakers in December pencilled three rate hikes into their 2017 forecasts, but committee members differ over assumptions regarding the extent to which tax cuts, spending and regulatory rollbacks proposed by Mr Trump and Republicans might boost growth and inflation.

“There is nothing in the statement that leads me to believe that their forecast has changed much,” said Roberto Perli, partner at Cornerstone Macro in Washington. “I don’t think there is any reason to question whether they are thinking about doing less or more than they were thinking in December.”

Solid

The FOMC repeated that it anticipates interest rates will rise gradually. The statement said job gains “remained solid” and the unemployment rate “stayed near its recent low,” a tweak from December’s language that the rate “has declined.”

“Inflation increased in recent quarters but is still below the committee’s 2 percent longer-run objective,” the Fed said. Market-based measures of inflation compensation are “still low,” the central bank said, after saying in December that such measures had “moved up considerably.”

Consumer spending “has been rising moderately,” while business fixed investment “has remained soft,” the Fed said in language similar to the previous meeting.

Surveys of consumers and businesses have shown significant increases in optimism for the economy following Mr Trump’s November win, although in some cases sentiment is divided along party lines. The University of Michigan’s gauge of consumer sentiment rose last month to a 13-year high, while the National Federation of Independent Business’s index of small-business optimism soared in December by the most since 1980.

The decision to leave the target federal funds rate unchanged in a range of 0.5 per cent to 0.75 per cent was unanimous and widely expected by investors. Fed chair Janet Yellen, who doesn’t have a press conference scheduled after this meeting, will have a chance to explain the decision further during her semiannual monetary-policy testimony to Congress in mid-February. The FOMC next meets in mid-March.

-(Bloomberg)