Fed keeps key rates unchanged; foresees fewer hikes in 2016

Staff Writer
Columbus CEO

WASHINGTON (AP) — The Federal Reserve is keeping a key interest rate unchanged in light of global pressures that risk slowing the U.S. economy.

As a result, Fed officials are now forecasting that they will raise rates more gradually this year than they had envisioned in December.

The central bank said Wednesday that the economy has continued to expand at a moderate pace but that global economic developments and financial markets still pose risks. Offsetting the threats, the Fed said in a statement after its latest policy meeting that indicators point to further strengthening in the job market. It sees some pickup in inflation.

Since raising its benchmark short-term rate from a record low in December, the Fed has held off on raising rates again given market jitters and a sharp slowdown in China.

Most economists think the Fed will raise rates twice this year, most likely beginning in June.

Most Fed watchers think the central bank wants more time to assess the financial landscape. Resuming its rate hikes too soon could slow growth or rattle investors again. The Fed is likely to give a nod to the improvements that have occurred since it met in January but also stress the uncertainties that loom.

This week, the government said that retail sales slipped in February and that Americans spent less in January than it had previously estimated. The report suggested that consumers remained cautious about spending despite a solid job market and lower gas prices.

The weaker-than-expected retail spending led some economists to downgrade their forecast for growth during the January-March quarter. Barclays reduced its estimate of annualized economic growth for the quarter to just 1.9 percent from a previous forecast of 2.4 percent.

The Fed has two mandates: To maximize employment and to keep prices stable. It has essentially met just one: In February, the United States added a robust 242,000 jobs — roughly the monthly average for the past six months. And the unemployment rate is a low 4.9 percent, close to the rate the Fed associates with full employment.

But inflation has been stuck below the Fed's 2 percent target rate for nearly four years. Too-low inflation tends to lead people to postpone purchases, which slows consumer spending, the economy's main fuel. Subpar inflation also makes the inflation-adjusted cost of loans more expensive.

Before further raising rates, the Fed wants to see more evidence that inflation is picking up. Its preferred inflation gauge did rise in January to a 12-month increase of 1.3 percent, faster than the scant 0.7 rise over the 12-month period that ended in December. But that's still well below the Fed's target.

The government reported Wednesday that core consumer prices — which exclude volatile food and energy costs — ticked up for a second straight month. Over the past 12 months, while overall consumer inflation has risen only 1 percent, core inflation has increased 2.3 percent, the sharpest 12-month increase since 2012.

Recent comments from Fed officials indicate that they differ on how to interpret inflation prospects.

Vice Chairman Stanley Fischer said last week that the Fed may "be seeing the first stirrings of an increase in the inflation rate — something that we would like to see."

Fischer suggested that two factors that have been depressing inflation — lower oil prices and a strong dollar, which reduces import prices — may be starting to wane.

But another Fed board member, Lael Brainard, said last week that she saw "troubling indications" that inflation could dip again. She also said she worried that weakness in China, Japan and other places could slow the U.S. economy.