The US Federal Reserve slashed its growth forecast for the nation’s economy this year after the rough winter, but kept policy on hold on Wednesday, showing faith in a modest rebound.
Fed Chair Janet Yellen said the economy had picked up after the first quarter’s contraction, but she also downplayed a pickup of inflation as any sign of a need to tighten monetary policy.
As expected the Federal Open Market Committee (FOMC) is cutting back its stimulus program by another US$10 billion, to US$35 billion a month, compared with US$85 billion in December last year before the taper began.
It also left the benchmark Federal funds interest rate at zero to 0.25 percent, where it has been since the end of 2008, arguing that the economy still needs such extraordinary accommodation into next year, when the rate is expected to rise.
The FOMC “believes that economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter,” Yellen said at a post-FOMC meeting news conference.
However, even with the unemployment rate having fallen quickly over the past year, to 6.3 percent, she said, “unemployment remains elevated, and a broader assessment of indicators suggests that under-utilization in the labor market remains significant.”
US stocks, which were trading slightly lower ahead of the FOMC announcement, liked the news and finished higher, the S&P 500 rising 0.8 percent to a new closing record of 1,956.98.
US Treasury bond yields were lower, and the US dollar meanwhile fell 0.4 percent to US$1.359 per 1 euro.
The FOMC now estimates economic growth this year at 2.1 to 2.3 percent, sharply down from the March prediction of 2.8 to 3 percent, before the depth of the winter setback was known.
However, the FOMC stuck to its growth forecast of 3 to 3.2 percent for next year, with inflation holding at around 2 percent.
And, in an issue markets were mainly focused on, the central bank’s policymakers left their forecast for interest rates largely intact.
The expected timeline for an increase in the Fed funds rate off the zero level remains the middle of next year, with the median prediction for the end of the year 1.125 percent, a slight rise from 1 percent expected in March.
Yellen said the Fed also has its eyes on risks in financial markets, where an uncommonly low level of volatility, combined with the large supply of cheap money, has raised worries among other analysts of a buildup of asset bubbles and systemic risks.
“This environment of low volatility is very much on my radar screen, and would be a concern to me if it prompted an increase in leverage or other kinds of risk-taking behavior that could unwind in a sharp way and provoke a sharp, for example, jump in interest rates,” Yellen said.
“And we have seen what effect that can have on the global economy, and I think it is something that is important to avoid,” she added.
Even so, she said, the Fed still has not seen any broadbased increase of leverage in financial markets, or other trends that might have heightened risks to the financial system.