Federal Reserve officials said Wednesday that they are monitoring global turbulence as they weigh whether to continue raising interest rates, but otherwise provided little new guidance about whether their plans will change amid recent market turbulence and signs of slowing growth.
In a statement posted after a two-day monetary policy meeting in Washington, the central bank said it would hold off from changing its interest rate target, keeping short-term rates between 0.25 percent and 0.5 percent.
The statement acknowledged that some of the indicators that are falling short of Fed officials’ projections, noting that economic growth likely slowed to end 2015, and that falling energy prices and other economic factors shaped by slowing growth overseas were likely to keep inflation below the Fed’s target in the “near term.”
Officials are “closely monitoring global economic and financial developments” and considering whether they could upset job growth, slow inflation or even change the direction of growth. Such a development could change the Fed’s plans for interest rates, but the statement otherwise gave no indication that Chairwoman Janet Yellen and company are ruling out futher rate increases.
All 10 members of the committee voted in favor of the statement.
Investors anticipated that the Fed would not raise rates this week. In the six weeks since the Fed’s historic December rate hike, the outlook for the economy has deteriorated enough to convince the private sector that the central bank is going to put off further rate increases for a long time.
After the December meeting, Fed officials released projections indicating that they expected to raise rates four times during 2016.
Before the Fed’s announcement Wednesday, however, investors expected just one rate hike this year, as indicated by futures market prices.
The difference is because of turbulence in stock markets and a number of signs of rising risk of the U.S. slipping into recession.
The indications of distress have been enough for some economists to suggest that the Fed made a mistake in December by signaling monetary tightening when economic signals suggested the need for loosening.
Some of the indicators are obvious: The Dow Jones Industrial Average has dropped nearly 10 percent since the December meeting.
Forecasters think that the gross domestic product likely slowed to near a standstill in the fourth quarter. Industrial production, as measured by the Fed, fell 1.8 percent annually through December. Andrew Levin, a Dartmouth economist who served as an adviser to Yellen at the Fed, warned this month that there has not been an instance in recent decades where production fell that steeply without a broader recession.
“Evidently, the prospect that the economy is now heading into a recession poses a much more significant risk than the prospect of economic overheating,” Levin wrote in a note on his academic site, calling on the Fed to refrain from further monetary tightening.
Some of the warning signs are more subtle, such as the hints of falling inflation expectations. Yellen and other Fed officials have said that as long as inflation expectations are stable, they don’t need to worry about low oil prices causing them to miss their 2 percent inflation target. Instead, low energy prices and a higher dollar will prove to be merely “transitory” effects on the economy. That assumption doesn’t hold, however, if inflation expectations are falling.
In the statement released Wednesday, the Fed said that suvey-based measures of inflation expectations were “little changed, on balance,” while bond market measures have fallen further.
Yet the most recent comments from members of the Fed system suggest that they are not panicking about the state of the economy and are not quite ready to abandon their projections for the economy to keep improving this year.
“The situation does not appear to have changed much since the [December] meeting,” Federal Reserve Bank of New York President William Dudley said this month.
Dudley, the vice chairman of the monetary policy committee, noted the recent weak economic data. But he pointed to the still-strong jobs numbers as reassurance that the economy will keep growing and that unemployment will keep dropping.
Wednesday’s statement reasserted the Fed’s expectation for the economy to grow at a “moderate pace.” For now, according to the Fed, its monetary policy “remains accomodative.”
Just how much confidence the Fed has in its projections for further growth will be made known at its March 15-16 meeting. Investors would expect any major decisions to be explained then, because the meeting will feature new projections from Fed members and a Yellen press conference.
Before then, Yellen will appear before the House Financial Services Committee Feb. 10 to deliver the semi-annual monetary policy testimony. Markets will pay close attention for Yellen to lay out whether she has changed her assessment of the economy.
