Business Standard

US Federal Reserve keeps benchmark interest rate unchanged

Image

AFP Washington
The US Federal Reserve kept its benchmark interest rate unchanged today but gave no clear signal about the chances for another increase this year.

But the central bank did confirm that it plans to begin to reduce its massive bond holdings "relatively soon."

In the absence of any signs of inflation pressure, the policy-setting Federal Open Market Committee elected to hold off on raising the key lending rate, and repeated that it "is monitoring inflation developments closely."

But the statement at the conclusion of the two-day meeting gave economists very few hints of the Fed's thinking since it was barely changed from the statement issued in June, when the central bank raised interest rates by a quarter point to the current range of 1.0-1.25 per cent.
 

Despite nearly seven years of uninterrupted job creation and a very low unemployment rate of 4.4 per cent, inflationary pressures and wage gains have shown little sign of life, something that has baffled economists.

The Fed has pointed to transitory factors like falling prices for mobile phone plans and prescription drugs, which will continue to depress closely-watched inflation measures for some time, but some analysts are skeptical that those factors explain the whole story.

The statement noted that the 12-month inflation rate as well as the core measure that excludes volatile food and energy prices have declined "and are running below two percent."

The June statement said the rates were "somewhat below" that target -- one of very few minor changes in the language.

And while inflation is expected to remain below the central bank's two percent target in the coming months, the statement repeated the view that it is expected to "stabilize around the Committee's two percent objective over the medium term."

Even faced with this low-inflation picture, the committee said it continues to expect "economic conditions will evolve in a manner that will warrant gradual increases" in the key policy interest rate.

The Fed's own projections in June showed the majority of policymakers expect a third rate hike this year, and three more in 2018 and 2019.

But analysts in recent weeks have become increasingly doubtful the Fed will decide to go ahead with a third increase in the benchmark lending rate this year, although a slight majority still sees another hike in December.

Meanwhile, the central bank also confirmed that it will begin implementation of a plan "relatively soon" to reduce the size of its investment holdings, which were built up to record levels during the financial crisis to help support the economy, especially once interest rates reached zero.

As long as the economy "evolves broadly as anticipated," the plan would gradually reduce the holdings of mortgage- backed securities -- something most analysts expect to start in September, the statement said.

Disclaimer: No Business Standard Journalist was involved in creation of this content

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Jul 27 2017 | 1:02 AM IST

Explore News