The US Federal Reserve on Wednesday said the US economy was expanding “at a solid pace” with strong job gains in a signal that the central bank remains on track with its plans to raise interest rates this year.
The Fed repeated that it would be “patient” in deciding when to raise benchmark borrowing costs from zero, though it also acknowledged a decline in certain inflation measures.
After a two-day meeting of the Federal Open Market Committee, policymakers struck an upbeat tone on the US economy’s prospects and held to their view that energy-led weakness in inflation would dissipate.
“The committee, in fact, was downright bullish on current economic conditions and the outlook,” IHS Global Insight director of financial economics Paul Edelstein said.
In making its announcement, the Fed largely skirted slumping economies in Europe and Asia, saying only that it would take “financial and international developments” into account when determining when to raise rates, adding a reference to global markets for the first time since January 2013.
“Economic activity has been expanding at a solid pace,” the Fed said in a statement that marked an upgrade to its prior assessment of a “moderate pace” of growth. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.”
Long-term US bond yields fell as some investors focused on the Fed’s reference to international developments and weak inflation, potentially widening the gap between the central bank’s language and what markets expect policymakers to do. The US dollar strengthened against a broad basket of currencies.
“Just the inclusion of international development, that’s probably perceived as dovish and the bond market is rallying probably on that,” High Frequency Economics chief US economist Jim O’Sullivan said.
O’Sullivan added that “at the end of the day, the baseline is still June for lift-off,” and said that the falling unemployment rate remains a key gauge for the Fed.
The Fed’s stance stands in sharp contrast to many of its peers in developed countries that have recently eased monetary policy to boost struggling economies. That was led by the European Central Bank’s 1 trillion euro (US$1.13 trillion) bond-buying program to stimulate the eurozone economy.
“You would have thought that if you were going to really postpone [a rate hike] to 2016, there would have been some more emphasis on international events and the dollar,” Wells Fargo economist John Silva said.
The policy divergence has helped push the US dollar to multi-year highs, a looming concern for the Fed, given the move’s negative impact on US exporters and inflation.
Many Fed officials have pointed to a possible rate increase around mid-year, but they again left the door open to a later move.
“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Fed said.
The central bank acknowledged inflation had declined further below its 2 percent target and that market-based price gauges had fallen substantially — a more negative assessment than it gave last month.
The Fed also provided a time frame for its inflation view, saying it expects inflation to rise gradually toward its goal over the “medium term.”
Fed officials have said they could begin raising rates even if inflation remains stuck at a low level, confident that economic growth and job gains would eventually produce rising prices.
They also view the initial “liftoff” as the start of an extended, years-long process in which rates are set to remain far below normal and continue to boost investment and spending.
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