Fed keeps rate unchanged; calls US growth 'moderate'

The US Federal Reserve Board building in Washington.
The US Federal Reserve Board building in Washington. REUTERS

WASHINGTON (AFP) - The Federal Reserve left its benchmark interest rate unchanged at near zero Wednesday, while describing US economic growth as “moderate” after the winter slowdown.

But predictions made by the individual participants in the Fed’s monetary policy meeting indicated most expect the federal funds rate to rise above 0.5 per cent by year-end.

The Federal Open Market Committee trimmed its economic growth forecast for 2015 to just 1.8-2.0 per cent, down from March’s 2.3-2.7 per cent outlook, to account for the unexpected contraction in the first quarter of the year.

But the FOMC suggested it expected the economy to continue to strengthen slowly, with growth picking up to a 2.4-2.7 per cent pace next year and the unemployment rate – a key referent for monetary policy – slipping from the current 5.5 per cent to as low as 5.2 per cent at the end of this year and 4.9 per cent in 2016.

Economic data since April, the FOMC said in its policy statement, “suggests that economic activity has been expanding moderately after having changed little during the first quarter.”

It said that while the jobless rate has not moved much, job creation has picked up and that, and other indicators, suggest falling slack in the employment market.

As for the other key base for policy, inflation, the FOMC said that the very low level of price gains is related to the crash in oil and import prices, both “transitory” effects that should disappear, allowing prices to rise toward its target rate of about 2 per cent.

“The committee continues to monitor inflation developments closely,” it said.

The hold on the first rate increase in nine years – with the rate at zero for more than six years – was expected after the first-quarter stall. A year ago, the FOMC had pointed to a first rate rise in mid-2015.

But Fed chair Janet Yellen said there were still signs of cyclical weakness in the economy, especially in the labour market.

Wage growth is slow, and the labour force participation rate remains low, she noted in a news conference.

“Room for further improvement remains.”

“My colleagues and I would like to see more decisive evidence that a moderate pace of economic growth will be sustained, so the conditions in the labour market will continue to improve and inflation will move back to 2 per cent,” she said.

The prospect of a rise in US interest rates has sparked turmoil in global markets for two years, with volatile currencies and capital flows challenging policy in many emerging-market countries.

Yellen sought to downplay the importance of the first rate hike, which she said was still likely “later this year”.

“The importance of the initial increase should not be overstated,” she said, assuring that further increases would only be gradual and reflect the strength of the economy.