As was widely expected the U.S. Federal Reserve has left rates unchanged in a range of 2.25 percent to 2.5 percent. What was surprisingly is the Fed is now signalling there will be no rate hikes in the months to come. They point to signs of renewed economic health but with unusually low inflation as the reason. After the news U.S. Government debt yields fell.
The decision to keep rates steady comes despite renewed pressure from President Donald Trump for the Fed to cut rates aggressively to help accelerate economic growth and to “rocket” the U.S. economy to new highs. Trump has been a vocal critic of the Fed when it previously raised rates. He has called the previous raises “crazy” and “foolish” and arguing the Fed’s policy was “the “biggest threat” to the US economy.
The Federal reserve in a statement offered a more upbeat view of the economy. The say that “economic activity rose at a solid rate,” since their last announcement in March. Last week data showed the U.S. economy grew at a surprisingly strong 3.2 percent annual rate in the January-March quarter. Market condition have also improved in the last quarter, mainly because of improved growth prospects with China. What was once seen as a trade war, in the last few months, has slowed down and the view is trade tensions between the world’s two biggest economies, the United States and China, is nearing a resolution.
Low inflation a concern
The Fed is also struggling to achieve it core mandate. Like any central bank their mandate is to keep inflation in check. Currently the U.S. fed has been unable to produce inflation close to 2 percent. Data shows inflation in the U.S is closer to 1.5 percent currently. In order for it to raise rates, inflation would have to be above 2 percent Low inflation is an obstacle. It often depresses consumer spending. People put purchases on hold, especially big ticket items, as they wait for prices to come down even further.
Despite the Fed saying it won’t raise rates for months, according to data experts investors foresee zero probability that the Fed will raise rates anytime this year. The CME Group says their bet is the Fed will cut rates before year’s end.
In a statement made after, the Fed said it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” It adds, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
The next time the Fed meets is in June. They will make an interest rate announcement at that time to, on June 19th.