Wednesday, September 21, 2016

Divided Fed Holds Interest Rates Steady but Notes Improving Economy - The New York Times by Benjamin Appelbaum

WASHINGTON — A divided Federal Reserve left its benchmark interest rate unchanged Wednesday, pressing ahead with its economic stimulus campaign for at least a few more weeks in the face of growing pressure to raise rates.

“The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” the Fed said in a statement that reflected the views of the majority.

But three members of the Fed’s 10-member policy-making committee voted to raise the benchmark rate, and most Fed officials said separately that they still expected to raise the rate once before the end of the year.

The Fed said in its statement that economic conditions were improving. “The growth of economic activity has picked up from the modest pace seen in the first half of the year,” it said.

But the statement noted that inflation remained slower than the Fed’s desired pace, and it said, “Near-term risks to the economic outlook appear roughly balanced.”

The Fed’s next scheduled meeting is in November, just six days before the presidential election. Its final meeting of the year is in mid-December.

The three dissidents, all of whom voted in favor of raising interest rates by a quarter-point in September, were Esther L. George, president of the Federal Reserve Bank of Kansas City; Loretta J. Mester, president of the Federal Reserve Bank of Cleveland; and Eric S. Rosengren, president of the Federal Reserve Bank of Boston. The statement did not explain their votes, but the three officials have all argued publicly in recent weeks that they saw growing risks in waiting.

The Fed is not only hesitating to raise rates this year; it also predicted that it would raise rates more slowly in future years. In a new round of economic projections published Wednesday, Fed officials predicted that the central bank’s benchmark rate would rise to 1.9 percent by the end of 2018, well below their March prediction that it would reach 3 percent by the end of 2018.

They continued to settle into a new view that growth will remain sluggish for the foreseeable future. Fed officials said they expected that economic growth would not exceed 2 percent over the next three years. They predicted that the unemployment rate would continue to fall a little, touching bottom at 4.5 percent in 2018, while inflation would rise to 2 percent by 2018 and stabilize at that level.

The Fed remains in a better position to raise rates than other major central banks, which are struggling to drive up inflation in the face of even lower interest rates and weaker growth.

The Bank of Japan tried earlier Wednesday to reinvigorate its own struggling campaign to bolster inflation, announcing for the first time that it would try to drive inflation above its current 2 percent target. Whether the bank will succeed is an open question: Despite an aggressive stimulus campaign, now in its fourth year, prices in Japan fell by 0.5 percent during the most recent 12-month period.

The European Central Bank cut its growth and inflation forecasts at its most recent meeting but, like the Bank of Japan, did not increase its stimulus campaign, judging it is doing what it can.

Officials at all three banks have suggested that too much is being asked of monetary policy. They argue that fiscal policy makers must embrace some combination of fiscal stimulus and structural reforms to increase growth, a view shared by a wide range of independent economists.

The American economy has posted steady growth since 2009, but Fed officials remain concerned that higher interest rates might disrupt that expansion. They also have concluded that a downturn in global interest rates has reduced the force of the Fed’s stimulus campaign even as the Fed stands still.

The central bank stimulates the economy by pushing borrowing costs below normal levels. The decline in borrowing costs on the private market means the normal level has been falling toward the Fed’s rate.

Fed officials who are calling for patience point to the persistent sluggishness of inflation as evidence that there is no urgency to raise interest rates. They note that the economy still appears to be recovering from the financial crisis. One important sign is the continuing rebound in the share of American adults in their prime working years, between the ages of 25 and 54, who are working or looking for work.

“We should be open to the possibility of material further progress in the labor market,” Lael Brainard, a Fed governor who has emerged as a leading voice for patience, said this month.

Other Fed officials, however, are increasingly impatient. They argue that continued employment gains increase the risk that the Fed will wait too long to raise rates.

Mr. Rosengren of the Federal Reserve Bank of Boston has been a leading proponent for the Fed’s stimulus campaign. But in recent weeks he has called for a rate increase. Waiting increases the chances that the Fed eventually will need to raise rates more sharply, he says, and historically, sharp rate increases cause recessions.

The Fed also faces political pressure, particularly from Republicans. Donald J. Trump, the Republican presidential nominee, has charged repeatedly that the Fed is holding down rates because Ms. Yellen wants to stimulate economic growth to benefit Democrats in the run-up to the presidential election.

Fed officials, while declining to respond directly to Mr. Trump, have rejected his criticism. Even those ready to raise rates say that political considerations are not a factor in the internal debate.

NYT

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