US Fed holds interest rates steady

US Federal Reserve Chair Janet Yellen speaks during a news conference in Washington. Picture: AP

THE US Federal Reserve has left interest rates unchanged while signalling that it expects a resilient US economy and solid job market to justify further rate hikes later this year.

The Fed’s pause comes after it modestly raised its benchmark short-term rate in December and March.

Most economists expect it to do so again when it next meets in mid-June.

The statement the Fed issued this morning after its latest policy meeting notes that the economy slowed during the January-March quarter but says it expects that slowdown to be “transitory.” Nearly eight years after the Great Recession ended, unemployment is at a low 4.5 per cent.

Key sectors of the economy appear sturdy.

Still, consumer spending and factory output have slowed, and inflation remains below the Fed’s target rate.

A trader at the New York Stock Exchange in New York where stocks remained negative after the Fed announcement. Picture: AFP

A trader at the New York Stock Exchange in New York where stocks remained negative after the Fed announcement. Picture: AFPSource:AFP

The Fed remains in the midst of a campaign to gradually raise interest rates from ultra-lows.

One reason for it to stand put this week is that even though the job market has shown steady strength, the economy itself is still growing in fits and starts.

On Friday, the government estimated that the economy, as gauged by the gross domestic product, grew at a tepid 0.7 per cent annual rate in the January-March quarter.

It was the poorest quarterly performance in three years.

Though some temporary factors probably held back growth last quarter and might have overstated the weakness, the poor showing underscored that key pockets of the economy — consumer spending and manufacturing, for example — remain sluggish.

On Monday, the government said consumer spending stalled in March for a second straight month. And the Institute for Supply Management reported a drop in factory activity.

Most economists have expressed optimism that the economy is strengthening in the current April-June quarter, fuelled by job growth, higher consumer confidence and stockmarket records. Many think that annualised growth could accelerate to around 3 per cent and that the Fed will soon feel confident to resume raising rates.

The US Federal Reserve building is seen in Washington, DC. Picture: AFP

The US Federal Reserve building is seen in Washington, DC. Picture: AFPSource:AFP

The global economic picture has also brightened somewhat.

It isn’t just the Fed’s short-term rate — a benchmark for other borrowing costs throughout the economy — that likely occupied attention at this week’s meeting. Officials probably also discussed how and when to start paring their extraordinary large $US4.5 trillion portfolio of Treasurys and mortgage bonds.

The Fed amassed its portfolio — commonly called its balance sheet — in the years after the financial crisis erupted in 2008, when it bought long-term bonds to help keep mortgage and other borrowing rates low and support a frail economy.

At the time, the Fed had already cut its short-term rate to a record low.

The balance sheet is now about five times its size before the financial crisis hit.

The Fed stopped buying new bonds in 2014 but has kept its balance sheet high by reinvesting the proceeds of maturing bonds.

The Fed’s thinking has been that reducing the balance sheet could send long-term rates up and work against its goals of fortifying the economy.

Now, as the Fed becomes more watchful about inflation pressures, the time is nearing when it will need to shrink its balance sheet, a process that could have the effect of raising some borrowing rates, at least modestly.

US Secretary of the Treasury Steven Mnuchin (R) speaks with Chair of the Board of Governors of the Federal Reserve System Janet Yellen. Picture: AFP

US Secretary of the Treasury Steven Mnuchin (R) speaks with Chair of the Board of Governors of the Federal Reserve System Janet Yellen. Picture: AFPSource:AFP

The Fed jolted investors when it released the minutes of its March meeting, which showed that most officials thought that process would be appropriate later this year. This was sooner than many investors expected.

The Fed didn’t clarify its timetable for paring its balance sheet in the statement it issued Wednesday.

One reason might have been that this week’s meeting wasn’t accompanied by a news conference with Chair Janet Yellen to explain any shifts in the Fed’s policy or thinking.

Ms Yellen will hold a news conference after the Fed’s next meeting ends June 14.

Some Fed officials have suggested that they would prefer not to be raising the short-term rate at the same time that they are beginning to reduce their balance sheet.

Giving investors too much to digest at once risks unsettling financial markets. In 2013, the Fed triggered a brief storm in bond markets when then-Chairman Ben Bernanke raised the possibility that the Fed would start tapering its bond purchases later that year, catching investors by surprise.

It’s also possible that the Fed chose not to reveal anything Wednesday about its timetable for reducing its balance sheet, in part because the policy committee has yet to reach a consensus on when or how to do so.

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