Federal Reserve leaves key interest rate unchanged

Federal Reserve Chair Janet Yellen. Photo / Getty Images

The US Federal Reserve has left its benchmark interest rate unchanged amid fresh doubts about the health of the U.S. job market and growing anxiety among investors that Britain might leave the European Union.

The Fed has repeatedly been frustrated in its attempts to wean the American economy off the massive stimulus that the central bank has been providing since the 2008 financial crisis. In December, it raised interest rates for the first time since the recession and expected to increase them four more times this year as the recovery picked up steam. Instead, the economy slowed to a crawl this winter, and by the time it strengthened this spring, job growth began to stumble.

"The pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up," the Fed said in a statement after wrapping up its two-day meeting in Washington.

The Fed's policy-setting committee voted unanimously to hold rates steady. Kansas City Fed President Esther George had dissented at previous meetings in favour of increasing the target rate, but he supported the decision.

Investors have long been sceptical of the potential for Fed action at this meeting. Britain is slated to hold a referendum next week over whether to remain in the European Union and a decision to exit - or, "Brexit" -threatens to upend long-established political order and rattle financial markets around the world.

Already this week, an index of market volatility, sometimes referred to as the "fear gauge," spiked to the highest level since February. Investors searching for safety have piled into the relative security of government bonds, sending the yield on the 10-year German bund into negative territory for the first time.

All economic projections are certain to turn out to be inaccurate in some respects, and possibly significantly so.

Fed chair Janet Yellen

On Wednesday, Wall Street's major indexes were modestly higher ahead of the central bank's decision. By early afternoon, the blue-chip Dow Jones Industrial Average was up 22 points, or 0.1 percent. The broader Standard & Poor's 500-stock index rose 4 points, or 0.2 percent. And the tech-heavy Nasdaq gained 12 points, or 0.3 percent. Yields on 10-year U.S. Treasuries, which move in the opposite director of prices, continued to slide.

The Fed's statement reiterated the cautionary message that it will "closely monitor" global economic and financial developments as well as inflation indicators, which have been running below the central bank's target of 2 percent for years. It also reasserted that its timeline for raising interest rates will depend on the evolution of the economy.

Indeed, the slow return to full strength has repeatedly forced the central bank to push back plans to withdraw its support. In March, officials reduced the number of expected rate hikes this year from four to two. Most of the Fed's 17 top officials maintained that position on Wednesday, but six indicated they believe the Fed should just move once more this year.

The Fed also downgraded its forecast for economic growth this year from 2.2 percent to 2 percent. However, its estimate of year-end inflation rose from 1.2 percent to 1.4 percent, inching closer to its target. Its projection for the U.S. unemployment rate was unchanged at 4.7 percent.

In its official statement, the central bank pointed to several encouraging signs in the economy. American consumers have proven remarkably resilient, with government data this week showeing retail sales remained robust in May despite the slowdown in hiring.
The Fed also pointed to strength in the hard-hit housing sector and an improving outlook for exports.

The economy has registered considerable progress over the past several years toward the Federal Reserve's goals of maximum employment and price stability.There are good reasons to expect that we will advance further toward those goals.

Fed chair Janet Yellen

In a speech in Philadelphia last week, Fed Chair Janet Yellen highlighted how far the U.S. recovery has come: The unemployment rate stands at 4.7 percent, down from a peak of 10 percent following the recession. Wage growth appears to be picking up. The economy has been growing, albeit slowly, for seven years, making it one of the longest expansions in American history.

"The economy has registered considerable progress over the past several years toward the Federal Reserve's goals of maximum employment and price stability," Yellen said.

"There are good reasons to expect that we will advance further toward those goals."

The central bank's unprecedented stimulus efforts have been a key component of that progress. It slashed its benchmark overnight interest rate to zero during the darkest days of the financial crisis in 2008 and pumped trillions of dollars into the economy in hopes of fostering faster growth.

The Fed took the first step toward withdrawing that support in December when it raised its target rate by one quarter of one percent, to a range of 0 to 0.25 percent. It was an important milestone in the nation's economic recovery and was supposed to signal the central bank's confidence that progress would continue.

But in her speech in Philadelphia, Yellen acknowledged the inherent uncertainty in those forecasts.

"All economic projections are certain to turn out to be inaccurate in some respects, and possibly significantly so," she said. "Indeed, the policy path that my colleagues and I judge most likely to achieve and maintain maximum employment and price stability has evolved and will continue to evolve in response to developments that alter our economic outlook and the associated risks to that outlook."