WASHINGTON – The latest on the U.S. Federal Reserve’s two-day policy meeting, which ended Wednesday. The central bank kept interest rates steady amid uncertainty about the global economy and financial markets. (All times local)
The upside-down world of negative interest rates has arrived in Europe and Japan, but Federal Reserve Chair Janet Yellen says Fed officials aren’t discussing them for the United States.
Central banks in Europe and Japan have imposed negative rates on the reserves that they hold for their commercial banks. That means the commercial banks actually pay the European Central Bank and the Bank of Japan to hold onto their money. The move is intended to push the banks to lend out the cash instead to people and businesses.
The Fed currently pays a one-half per cent interest rate on U.S. bank reserves.
Yellen says that negative rates have had mixed effects overseas, and that they aren’t being discussed by Fed officials.
Yellen says sluggish wage growth suggests there may be many Americans available and willing to work, even though the unemployment rate has fallen to an eight-year low of 4.9 per cent.
If businesses perceive that there are still many candidates for open jobs, they don’t need to offer much higher pay to attract new members.
The potential existence of what economists call “slack” in the labour market could be a reason why the Fed indicated in a separate set of projections that it will raise interest rates only twice this year, down from an earlier projection of four times in December.
Fewer increases might allow the economy to grow faster and push up pay.
“I’m somewhat surprised we’re not seeing more of a pickup in wage growth,” Yellen said in a press conference.
With the unemployment rate near what the Fed says is consistent with a healthy economy, businesses typically should be forced to offer higher pay.
Fed Chair Janet Yellen has just put a time frame on when she expects the inflation rate to finally reach the Fed’s target of 2 per cent: Not for another two to three years.
Inflation has already trailed the Fed’s target for more than three years. While low prices may seem like a good deal for consumers, tepid inflation generally is a sign the economy is growing sluggishly. Bigger price increases, meanwhile, usually suggest retailers feel their customers can pay more.
Inflation has picked up in the past couple of months. Yet Yellen indicated during a press conference that she doesn’t think those increases will necessarily continue.
Yellen’s time frame on inflation echoes what Fed policymakers have said before. In their latest projections, Fed officials said they don’t see inflation reaching 2 per cent until 2018.
Federal Reserve policymakers have a slightly more optimistic view of the unemployment rate for the next few years than they did just a few months ago.
Fed officials now see the rate falling to 4.6 per cent by the end of 2017 and 4.5 per cent by the end of 2018. Both figures are one-tenth of a percentage point lower than in their December forecasts. The figure now stands at 4.9 per cent, and officials see it ticking down two-tenths of a point by the end of this year.
All those figures are below their estimate of the long-term unemployment rate consistent with a normal economy, which is 4.8 per cent. Forecasting a rate that is lower than the long-term average suggests that Fed policymakers hope the economy is strong enough to push the rate below normal. That could force employers to offer higher pay and accelerate growth.
The Federal Reserve is keeping short-term interest rates unchanged at a range between 0.25 per cent and 0.5 per cent, citing the risks posed by global economic and financial turmoil.
Fed officials also see just two rate hikes this year, according to their latest projections, down from a previous estimate in December of four increases. The reduced number of hikes suggests Fed policymakers have grown more cautious in the wake of weaker growth overseas and gyrating financial markets.
The Fed raised the short-term rate it controls in December from nearly zero for the first time in almost a decade. Most economists forecast before the meeting that the Fed would raise rates only twice this year.
Markets are awaiting the Federal Reserve’s latest policy statement due out at 2 p.m. Stocks have been relatively quiet following a raft of generally positive economic reports in the morning. The data may reassure Fed officials that the U.S. economy is still growing despite weakness overseas.
Manufacturing output ticked up in February, its second straight increase. Builders broke ground on more houses and apartments. And consumer prices, excluding the volatile food and energy categories, have increased 2.3 per cent in the past year, the most in more than two years. Inflation typically rises when the economy is growing.
The Dow Jones industrial average was down 25 points to 17,225.23 as of 12:55 p.m. Eastern time. The Standard & Poor’s 500 index and Nasdaq composite index were both flat.
Global financial markets are in a wait-and-see mode ahead of a statement Wednesday from the U.S. Federal Reserve policy and comments from Chair Janet Yellen.
Markets tend to swing more forcefully after the Fed updates its economic forecast, said Deutsche Bank analyst Alan Ruskin.
According to Ruskin, market movements after the Fed statement “vastly exceed” even days when the Labor Department releases jobs numbers.
Futures markets point to a fairly flat open in the U.S., with the S&P 500 index set for a 0.1 per cent drop at the bell. Futures do not always foretell what markets will do. In the currency markets, the dollar traded in a fairly narrow range.
Investors are cautious with the U.S. Federal Reserve wrapping up its two-day meeting. They are looking for hints as to when the central bank might raise interest rates again.
The Fed is expected to keep rates on hold Wednesday, but it will issue a statement, update its economic forecasts and Chair Janet Yellen will speak.
In December, the Fed raised its benchmark rate for the first time in nearly a decade. But volatility in financial markets and a slowdown in global economic growth have since then raised concern that the U.S. economy might not be strong enough to handle another rate increase now.
Rate increases can weigh on stocks because they make borrowing marginally more expensive, and that has the potential to slow economic activity.
In European trading, Germany’s DAX rose 0.5 per cent. Japan’s Nikkei is down 0.83 per cent. Dow and S&P 500 futures are essentially flat.