The Washington PostDemocracy Dies in Darkness

Fed leaves rates unchanged, lowers economic forecasts

In a news conference following a two-day policy meeting, Federal Reserve Board Chair Janet Yellen announces there will be no change in interest rates. (Video: Reuters)
Placeholder while article actions load

The Federal Reserve left its benchmark interest rate unchanged today and lowered its economic forecasts after a turbulent start to the year in financial markets and lackluster U.S. growth persuaded the central bank to reassess the timing and magnitude of its plan to raise rates.

The Fed maintained its target for interest rates at a range of 0.25 to 0.50 percent to give the U.S. recovery more time to get on a stable track without making recovery more difficult for the rest of the world, where growth is flagging.

Only one member of the Federal Reserve's open market committee dissented from the decision to postpone action. Esther L. George urged the central bank to boost rates by a quarter of a percentage point now. The consensus forecast of the committee suggested that the Fed expects to raise rates on two or three occasions later this year.

U.S. economic activity has been expanding "at a moderate pace," the Federal Reserve noted in a statement, but it said that investments by businesses and exports "have been soft," inflation remained below the central bank's 2-percent target, and "global economic and financial developments continue to pose risks."

Asked about their individual projections, the Fed governors indicated that they expect lower interest rate increases this year than previously thought. In December, the median forecast for the influential federal funds rate in 2016 was 1.4 percent. Today, the board said its median forecast had cooled to a target of 0.9 percent. The Fed governors also substantially lowered their forecasts of federal funds rates in 2017 and 2018 to 1.9 and 3.0 percent respectively.

Slow U.S. growth was key. The Fed cut its forecasts of GDP growth in 2016 to 2.2 percent, down from a 2.4 percent forecast made in December. The central bank also trimmed its inflation forecast to 1.2 percent, down from a 1.6 percent prediction in December. Projections of unemployment, however, remained unchanged at 4.7 percent.

Fed chairman Janet Yellen said in a press conference that the central bank “continues to feel we are on a course where the economy is improving.” She said that “if it continues that way we are likely to raise rates over time.”

She said there appeared to be little risk of reigniting inflation now, adding that even if oil prices rebounded to $50 a barrel there would be little or no change in monetary policy. Asked about whether she saw signs of wage inflation picking up, Yellen said “in the aggregate data one doesn’t see any convincing evidence of a pickup in wage growth,” even though there was some pickup in “isolated” occupations.

For the second straight month, the Federal Reserve did not give an assessment of the balance of risk in the economy, seen as an indication of uncertainty among members of the Fed. Yellen said "there is no collective judgment in this statement as to whether the risks are weighted to one side or other.”

But the central bank said in its statement that it would scrutinize inflation data, especially as "the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further." At the moment, however, the board members said they expect no change in the so-called core inflation rate that excludes food and energy.

The Fed's expectations for its influential benchmark interest rate over the next two years fall below the 3.3 percent levels the Federal Reserve considers normal in the long run. Yellen has said that a return to normal levels would be gradual, and the board's statement today said that "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."

The Fed raised its benchmark interest rate in December from near zero to a range of 0.25 to 0.50 percent -- the first increase in nearly a decade. The move amounted to a vote of confidence in the nation’s economic recovery, and officials at the time indicated they anticipated hiking four more times this year.

In December, many investors had expected the next increase would happen at this meeting. But retail sales and other economic indicators remain weak. Global financial markets have tumbled amid sagging commodity prices and reports of slowing growth in China. The U.S. dollar remained strong, weighing on American exports and holding down the cost of imports. And oil prices plumbed decade-old lows, further restraining inflation.

That persuaded the Fed to stay its hand today.

The Fed is charged with two main goals: fostering maximum employment and keeping prices stable. The U.S. job market has remained strong despite the global financial turmoil, with recent data showing robust hiring and rising participation in the labor force. In addition, oil prices seem to have stabilized, and there are early signs that inflation is finally beginning to creep toward the Fed’s target of 2 percent after years of missing the mark.

“We may well at present be seeing the first stirrings of an increase in the inflation rate -- something that we would like to happen,” Fed Vice Chair Stanley Fischer said last week.

Other officials are more cautious, however. In a speech last month, New York Fed President William Dudley said he felt the risks to the economy “may be starting to tilt slightly to the downside.” The sentiment was echoed by Fed Gov. Lael Brainard last week, arguing that the recovery should not be taken for granted.

“It is critical to carefully protect and preserve the progress we have made here at home through prudent adjustments to the policy path. Tighter financial conditions and softer inflation expectations may pose risks to the downside for inflation and domestic activity,” she said. “From a risk-management perspective, this argues for patience as the outlook becomes clearer.”

Post staff writer Ylan Mui contributed to this article.