Fed Stays Hands-Off, Sees No Moves In 2020
INTEREST RATES
The Associated Press
UGABER WASHINGTON - The Federal Reserve left its benchmark interest rate alone Wednesday and signaled that it expects to keep low rates unchanged through next year.
The Fed's decision follows three rate cuts this year and reflects its view that the U.S. economy has, so far, withstood the U.S.-China trade war and a global slump and remains generally healthy. Its benchmark rate - it influences many consumer and business loans - will remain in a low range of 1.5 percent to 1.75 percent.
In a sign of its confidence about the economy, the Fed's latest policy statement dropped a phrase it had previously used that referred to "uncertainties" surrounding the economic outlook. That suggests that the Fed might be less worried about the impact of trade fights or overseas developments.
At a news conference afterward, Chairman Jerome Powell expressed optimism about the economy and satisfaction that the Fed's rate cuts this year might have helped prolong growth.
"Both the economy and monetary policy are in a good place," Powell said.
Many analysts note, though, that the economy faces risks from the trade conflicts, a stumbling manufacturing sector and cutbacks in business investment. Some say the Fed might feel compelled to cut rates at least once next year.
Still, in updated forecasts the Fed issued Wednesday, no officials penciled in a rate cut in 2020. Instead, four Fed officials said they expected a rate increase next year. The remaining 13 officials projected no change to rates.
Persistently low inflation with very low unemployment have led many Fed officials to conclude that rates can remain lower for much longer than they thought without spurring higher prices. Low rates help consumers and businesses afford to borrow and spend. Still, savers have struggled to find returns outside the stock market that can keep them ahead of inflation.
"The Fed is pretty satisfied with the direction of the economy at the moment, and they see no need to bend in either direction by either cutting rates or raising rates through 2020," said Sung Won Sohn, a business economist at Loyola Marymount University in Los Angeles.
At his news conference, Powell suggested that even with the pace of hiring solid and unemployment low, he thinks the Fed can further strengthen the job market through a low-rate - or "accommodative" - policy.
"Even though we are at 3 ½ percent unemployment, there is actually more slack out there, in a sense," Powell said. "And the risks of using accommodative monetary policy, our tool, to explore that, are relatively low."
Powell also made it clear that he thinks higher rates are unlikely anytime soon.
"In order to move rates up," he said, "I would want to see inflation that is persistent, that is significant, before raising rates to address inflation concerns. That is my view."
Powell has said that this year's rate cuts have helped lower mortgage rates and spurred growth in home purchases. Auto sales also have remained healthy, as more Americans have borrowed to buy cars.
After having raised its benchmark short-term rate four times in 2018, the Fed reversed course this year and cut rates three times, to a range of 1.5 percent to 1.75 percent. Powell has portrayed those cuts as mainly "insurance" against a slowdown resulting from weak global growth and President Donald Trump's prolonged trade war with China.
Monthly job growth reached its highest point this year in November, and the unemployment rate matched a 50-year low of 3.5 percent. Measures of consumer confidence also remain at historically high levels.
Tame inflation and ultra-low unemployment have led Fed officials to rethink their view of the so-called neutral rate. This is the point at which the Fed's key rate is believed to neither accelerate economic growth nor restrain it.
The neutral rate typically shouldn't change very often or very much. But the Fed's policymakers estimate that the neutral rate is now 2.5 percent, down from 3 percent as recently as September 2018.
And Fed Vice Chair Richard Clarida suggested last month that full employment - that's the lowest rate that the Fed thinks the jobless rate can go before it starts escalating inflation - could be as low as 3.6 percent. A year ago, the Fed thought it was 4.4 percent.
On Wednesday, Powell acknowledged that the Fed was caught by surprise when the economy appeared to weaken late last year.
"Toward the end of 2018, there was still a sense that the economy was growing at around 3 percent, and it didn't," he said. "I didn't expect to face the challenges, but I think we did face them, and I'm pleased that we moved to support the economy in the way that we did. I think both the economy and monetary policy right now - I think are in a good place."
Many analysts note that the economy faces risks from trade conflicts, a stumbling manufacturing sector and cutbacks in business investment. Some say the Fed might feel compelled to cut rates at least once next year.
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