Fed Keeps Key Rate Steady But Notes Rising Inflation

The Fed did note that household spending has slowed from its robust pace in the final months of 2017

By Molly Priddy

WASHINGTON — The Federal Reserve kept its benchmark interest rate unchanged Wednesday but noted that inflation is nearing the Fed’s 2 percent target rate after years of remaining undesirably low.

The Fed ended its latest policy meeting by leaving its key short-term rate unchanged at 1.5 percent to 1.75 percent, the level it set in March after its sixth rate increase since December 2015. The Fed is gradually tightening credit to control inflation against the backdrop of a tight job market, a resilient economy and a pickup in consumer prices.

In a statement, the central bank said it expects “further gradual increases” in rates and says recent data show it’s edging close to achieving its annual 2 percent target for annual inflation.

“Inflation on a 12-month basis is expected to run near the committee’s symmetric 2 percent objective over the medium term,” the Fed said.

The reference to “symmetric” suggests that Fed officials might be willing to let inflation run slightly above its 2 percent target for some time, given that inflation has run below the target for six years.

The Fed’s statement noted that the U.S. job market has continued to strengthen along with a steady economy, now into its ninth year of expansion since the Great Recession ended.

“Job gains have been strong, on average, in recent months and the unemployment rate has stayed low,” the statement said.

The Fed did note that household spending has slowed from its robust pace in the final months of 2017 and held back economic growth in the January-March quarter. But most economists expect a solid rebound, with the economy expanding at a 3 percent annual rate or better, in the current April-June quarter.

Despite signs that inflation is edging up, few analysts expect any aggressive pickup in rate hikes. Most foresee either two or three additional increases in the Fed’s benchmark rate by year’s end, coming after an earlier hike in January.

The next rate increase is expected in June. Some analysts think the Fed may signal then that it foresees four hikes for 2018, up from the three it predicted in March.

The Fed’s decision Wednesday, which had been expected, came on an 8-0 vote. It was Jerome Powell’s second meeting as chairman since succeeding Janet Yellen earlier this year. Powell in the past has signaled support for the gradual pace of rate hikes that Yellen oversaw.

At a news conference after the central bank’s previous meeting in March, Powell had said, “We’re trying to take the middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the federal-funds rate.”

Bond investors are signaling that they expect a pickup in U.S. inflation, having bid up the yield on the 10-year Treasury note last week above 3 percent before the yield settled just below that. A year ago, the 10-year yield was just 2.3 percent.

The central bank is meeting as its board is undergoing a makeover, with a raft of new Trump appointees who appear generally supportive of the Fed’s cautious approach to rates since the Great Recession ended.

Despite Trump’s complaints during the presidential race that the Fed was aiding Democrats in keeping rates ultra-low under President Barack Obama, his choices for a chairman and for other slots on the Fed’s board have been moderates rather than hard-core conservatives who would favor a faster tightening of credit.

Under Powell’s predecessors, Yellen and Ben Bernanke, the board endured criticism from some Republicans over its decision to pursue a bond purchase program designed to cut long-term borrowing rates and to leave its key rate at a record low near zero for seven years. The critics charged that those policies would eventually produce destructive bubbles in the prices of stocks and other assets and, eventually, undesirably high inflation.

Since the Fed began raising rates in December 2015, the pace has been modest and gradual: One quarter-point rate increase in 2015, one in 2016, three in 2017 and one so far this year. Even now, the Fed’s benchmark short-term rate, which influences consumer and business loan rates throughout the economy, remains in a low range.

Two weeks ago, Trump announced the nomination of Richard Clarida, a Columbia University economist and expert on monetary policy, as the Fed’s vice chairman. That choice was seen as providing specialized expertise for Powell, who is not an economist.

The president also nominated Michelle Bowman, the Kansas state bank commissioner, for a Fed board slot that is normally reserved for a community banker. Earlier, Trump chose Randal Quarles, an investment banker, as vice chairman for bank supervision, and Marvin Goodfriend, an economist at Carnegie Mellon University, for another vacant board seat.

The president’s nominations generally match mainstream views on the Fed’s proper role in managing rates. One exception is Goodfriend, who has favored changes pushed by conservatives to limit the Fed’s flexibility in rate decisions. Goodfriend’s nomination squeaked out of a Senate committee on a 13-12 vote, with all Democrats opposed, indicating he could face difficulty winning confirmation by the full Senate.

Even if Trump’s selections all win approval, he would still have one more vacancy to fill on the seven-member board.