Federal Reserve officials announced Wednesday that they had held their interest rate target steady, further cementing the central bank’s shift away from previous plans to tighten monetary policy over the course of 2019.
The decision to hold short-term rates below 2.5%, which was expected by investors, comes as President Trump has pressured Fed Chairman Jerome Powell to lower rates and expand the Fed’s balance sheet to stimulate the economy.
Powell has said that Trump’s demands have not factored into the decisions by the Fed in recent months to abandon rate-hike plans and to stop shrinking its balance sheet. Powell has said that the about-face was instead based on news about the economy, especially a slowdown in global growth. After years of efforts to reverse crisis-era efforts to ease money, Fed officials now say they should be “patient” in moving to bring policy back to normal.
Wednesday’s announcement nevertheless endorsed the health of the U.S. economy, saying that “economic activity rose at a solid rate” in recent months.
Another major factor in the Fed officials’ reversal has been the failure of inflation to rise, as they previously thought it would as unemployment fell. Unemployment is now 3.8%, as low as it has been since 1969, yet inflation has failed to crack the Fed’s 2% target. Instead, it stood at 1.5% in March. The statement published by the Fed Wednesday highlighted the lack of strong inflation, noting that inflation measures “have declined and are running below 2 percent.”
The lack of higher inflation suggests that Fed officials had the wrong model of inflation in mind last year when they raise rates several times and penciled in several more rate hikes for 2019 — or that the unemployment rate fails to capture the full health of the labor market. The recent strong pace of job creation indicates that there are more people willing to take jobs than economists previously realized.
Before Wednesday’s announcement, investors were betting that it was more likely that the Fed would cut rates this year than that they would raise them further.
Powell said after the announcement that Fed officials “don’t see a strong case for moving [rates] in either direction.”
“The committee is comfortable with our current policy stance,” he said at a press conference.
The case for raising interest rates is simply that, in the past, short-term rates (which are the Fed’s main tool for setting monetary policy) were much higher at times of economic health. In 2006, for example, the Fed set its target as high as 5.25%.
But investors and Fed officials now believe that the economy has changed and that the short-term interest rate target that would go along with stable inflation is likely much lower. The Fed officials at the March monetary policy meeting projected, as a group, that short-term rates would only ever go as high as 2.8% in the years ahead, meaning that at most one more rate hike will ever be justified.
No Fed officials dissented from the decision.
