Paul Davidson, USA TODAY
The Federal Reserve kept interest rates unchanged Wednesday and said it’s closely monitoring global economic and market turmoil, but gave no signal that it’s retreating yet from plans to raise rates gradually this year.
An increase was not expected Wednesday after the Fed lifted its benchmark rate last month for the first time in nearly a decade — by a modest quarter-percentage point to 0.4% — and said it aims to nudge up the rate slowly the next few years amid tepid economic growth.
Some analysts expected the Fed to hint that even a March hike had become less likely after this month’s troubling news about China’s slowdown, sharp fall in stock and oil prices, and concerns that the 6.5-year-old U.S. recovery may be petering out. Adding to that mindset is that the cheap crude and a strengthening dollar have further pushed down meager inflation.
In a statement after a two-day meeting, the Fed said it’s “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of the risks to the outlook.”
The comment suggests the Fed is taking a wait-and-see approach to the recent troubles, but isn’t yet backtracking from plans to gradually boost interest rates, which raises borrowing costs for consumers and businesses and is aimed at heading off a spike in inflation. Last month, the Fed provided a more upbeat view, saying the risks to its economic and labor market outlook were “balanced.” On Wednesday, it didn't quite say risks had shifted to the downside but did note it's keeping a close eye on the overseas troubles.
Some economists expected the Fed to more clearly voice concerns that the international and market developments could crimp the U.S. economy, a view it expressed in September when China's stumbles similarly rocked markets.
Such language in Wednesday’s statement likely would have indicated that a March rate increase was now a long shot, says Michael Gapen, chief U.S. economist of Barclays and a former Fed staffer. And that would have suggested the Fed may raise rates just twice in 2016 instead of the four quarter-point increases economists expected. News that the Fed hasn't ruled out a March hike sent stocks tumbling Wednesday afternoon.
While the Fed tempered its economic outlook Wednesday, it appeared to place more emphasis on a labor market that has continued to churn out well over 200,000 jobs a month. Economic data “suggests that labor market conditions improved further as economic growth slowed late last year,” the Fed said. Many economists expect the government to report on Friday that the economy grew well under 1% at an annual rate in the fourth quarter, but they anticipate a rebound to a 2%-plus pace in the current quarter. And the Fed cited "strong job gains," with employers adding an average 284,000 jobs a month since October.
Household spending and business have increased “at moderate rates in recent months,” the Fed added in a slight downgrade from its December description. It said exports and business stockpiling slowed.
Fed policymakers acknowledged the additional downward pressure on inflation, saying that it’s “expected to remain low in the near-term,” partly because of falling energy prices and a dollar that’s keep a lid on import prices and inflation. Bu they continue to expect those effects to be transitory and inflation to drift toward the Fed’s 2% annual target in the medium-term.
Some economists say that January's renewed international and market strains ultimately could force the Fed to take an even more cautious approach but that it’s too early for policymakers to cast doubt on a March move.
"Overall, a March rate hike is still possible, but it will require signs of improvement in the incoming economic data and financial markets that may not show up quickly enough," economist Paul Ashworth of Capital Economics wrote in a note to clients.
While the global developments, oil crash and strengthening dollar have walloped exports, factory output and business investment, U.S. job growth and consumer spending generally have underpinned a solid domestic economy. And the near-normal 5% unemployment rate is expected to finally spur more rapid wage growth and inflation this year. The Fed, in turn, is struggling to gauge the net effects the opposing forces are likely to have on the economy.
Paul Davidson on Twitter: @PDavidsonusat.