By Ylan Q Mui
The Federal Reserve said last Thursday that the US economy faces new threats from abroad and needs continued support to grow, backing away from expectations that the moment had come to raise interest rates for the first time in nearly a decade.
The risks are many: Breakneck growth in China finally appears to be slowing down — and it’s unclear whether officials there know how to handle that. Wild swings in financial markets around the globe have put investors on edge. Even Canada is in a recession.
The global turmoil had already coloured the Fed’s two-day meeting in Washington — long regarded by many investors as the time when it could finally raise rates.
In the end, what was striking was not only that officials overwhelmingly voted to keep the central bank’s interest rate at zero, but also that there were also fresh doubts that the economy would be ready to stand on its own anytime soon.
In a news conference, Fed Chair Janet Yellen said the United States has been sheltered from the global storm — so far. But the stronger dollar could continue to drag down exports.
The plunge in oil prices may keep inflation low. And tighter financial conditions may make it more costly for businesses to invest.
“There will always be uncertainty,” she said. “But in light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States.”
Stock markets gyrated on the news, first spiking ahead of the 2 p.m. announcement, then falling. The benchmark Standard & Poor’s 500 index fell 0.3 percent, or 5.11 points, to 1,990.20.
While the Fed hesitated on its move to raise rates, it also faced new pressure to keep its unprecedented economic stimulus in place.
According to projections released Thursday, four of the Fed’s top officials think it should not raise rates at all this year, with one pushing out the first increase to 2017. And of the majority who still think the central bank should move this year, most now anticipate only one increase, rather than two.
Prominent institutions such as the International Monetary Fund and the World Bank, as well as influential economists such as former Treasury secretary Lawrence H Summers and Nobel-winning economist Joseph Stiglitz, have argued against a rate increase.
Rep John Conyers Jr (D-Mich.) said he plans to introduce legislation that would require the Fed to set as its goal an unemployment rate of 4 percent. The jobless rate is currently 5.1 percent.
“It is unacceptable for any branch of our government to take any action to slow our economy before all Americans have the opportunity to experience the jobs recovery and see meaningful wage growth,” Conyers said.
The Fed cut its benchmark rate to zero during the throes of the 2008 financial crisis, sending the cost of borrowing money plunging for goods including cars, homes and factory equipment. The Fed lowers its target rate when it wants to stimulate the economy by encouraging businesses and consumers to spend.
It increases the target rate when the economy begins to grow too quickly and inflation picks up, making saving money more attractive.
Timing, however, is crucial. If the Fed moves too soon, it risks undercutting the recovery’s momentum. Waiting too long could feed dangerous financial bubbles.
Although most officials predicted the Fed would raise its target rate several times next year, they also forecast it would remain below its historic norm of about 4 percent for several years.
Fed show the long-run median estimate at 3.5 percent.
Each increase will also probably be small; analysts expect just one-quarter of one percent.
That would allow the central bank to assess how an economy grown accustomed to easy money operates under a new regime.
Washington Post
By Ylan Q Mui
The Federal Reserve said last Thursday that the US economy faces new threats from abroad and needs continued support to grow, backing away from expectations that the moment had come to raise interest rates for the first time in nearly a decade.
The risks are many: Breakneck growth in China finally appears to be slowing down — and it’s unclear whether officials there know how to handle that. Wild swings in financial markets around the globe have put investors on edge. Even Canada is in a recession.
The global turmoil had already coloured the Fed’s two-day meeting in Washington — long regarded by many investors as the time when it could finally raise rates.
In the end, what was striking was not only that officials overwhelmingly voted to keep the central bank’s interest rate at zero, but also that there were also fresh doubts that the economy would be ready to stand on its own anytime soon.
In a news conference, Fed Chair Janet Yellen said the United States has been sheltered from the global storm — so far. But the stronger dollar could continue to drag down exports.
The plunge in oil prices may keep inflation low. And tighter financial conditions may make it more costly for businesses to invest.
“There will always be uncertainty,” she said. “But in light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States.”
Stock markets gyrated on the news, first spiking ahead of the 2 p.m. announcement, then falling. The benchmark Standard & Poor’s 500 index fell 0.3 percent, or 5.11 points, to 1,990.20.
While the Fed hesitated on its move to raise rates, it also faced new pressure to keep its unprecedented economic stimulus in place.
According to projections released Thursday, four of the Fed’s top officials think it should not raise rates at all this year, with one pushing out the first increase to 2017. And of the majority who still think the central bank should move this year, most now anticipate only one increase, rather than two.
Prominent institutions such as the International Monetary Fund and the World Bank, as well as influential economists such as former Treasury secretary Lawrence H Summers and Nobel-winning economist Joseph Stiglitz, have argued against a rate increase.
Rep John Conyers Jr (D-Mich.) said he plans to introduce legislation that would require the Fed to set as its goal an unemployment rate of 4 percent. The jobless rate is currently 5.1 percent.
“It is unacceptable for any branch of our government to take any action to slow our economy before all Americans have the opportunity to experience the jobs recovery and see meaningful wage growth,” Conyers said.
The Fed cut its benchmark rate to zero during the throes of the 2008 financial crisis, sending the cost of borrowing money plunging for goods including cars, homes and factory equipment. The Fed lowers its target rate when it wants to stimulate the economy by encouraging businesses and consumers to spend.
It increases the target rate when the economy begins to grow too quickly and inflation picks up, making saving money more attractive.
Timing, however, is crucial. If the Fed moves too soon, it risks undercutting the recovery’s momentum. Waiting too long could feed dangerous financial bubbles.
Although most officials predicted the Fed would raise its target rate several times next year, they also forecast it would remain below its historic norm of about 4 percent for several years.
Fed show the long-run median estimate at 3.5 percent.
Each increase will also probably be small; analysts expect just one-quarter of one percent.
That would allow the central bank to assess how an economy grown accustomed to easy money operates under a new regime.
Washington Post
