The US Federal Reserve on Wednesday left interest rates unchanged, but signaled it still expects one more increase by the end of the year, despite a recent bout of weak inflation.
New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the “appropriate” level for the US federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25 and 1.50 percent by the end of this year.
That is one-quarter of a point above the current level.
Financial markets barely moved after the release of the statement and projections. There was also little reaction to the Fed’s announcement that it would begin decreasing its balance sheet next month.
In its policy statement, the Fed cited strength in the job market, growth in business investment and an economic expansion that has been moderate, but durable this year.
It added that the near-term risks to the economic outlook remained “roughly balanced,” but said it was “closely” watching inflation.
Fed Chair Janet Yellen said in a news conference after the meeting that the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.
“What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent,” she said, adding that if they do, “it would require an alteration of monetary policy.”
While the interest rate outlook for next year remained largely unchanged in the Fed’s latest projections, with three hikes envisioned, the central bank did slow the pace of anticipated monetary tightening from there.
It forecasts only two increases in 2019 and one in 2020.
It also lowered again its estimated long-term “neutral” interest rate from 3 percent to 2.75 percent, reflecting concerns about overall economic vitality.
The Fed said it would next month begin to reduce its approximately US$4.2 trillion in holdings of US Treasury bonds and mortgage-backed securities by initially cutting up to US$10 billion each month from the amount of maturing securities it reinvests.
That action would start a gradual reversal of the three rounds of quantitative easing the Fed pursued between 2008 and 2014 to stimulate the US economy after the 2007 to 2009 financial crisis and recession.
The limit on reinvestment is scheduled to increase by US$10 billion every three months to a maximum of US$50 billion per month until the central bank’s overall balance sheet falls by perhaps US$1 trillion or more in the coming years.
It would take a “material deterioration” in the US economy’s performance for the Fed to reverse a schedule she expects to proceed “gradually and predictably,” Yellen said.
Meanwhile, the Fed said that the recent hurricanes in the US would affect economic activity, but “are unlikely to materially alter the course of the national economy over the medium term.”
Forecasts for economic growth and unemployment into next year and beyond were largely unchanged.
GDP is expected to grow at a rate of 2.4 percent this year, 2.1 percent next year and 2 percent in 2019.
The unemployment rate is forecast to remain at 4.3 percent this year before falling to 4.1 percent next year and remaining there in 2019.
Inflation is expected to remain under the Fed’s 2 percent target through next year before hitting it in 2019.
There were no dissents in the Fed’s policy decision.
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