Fed Officials Expected to Keep Rates Steady
April 30 2017 - 3:31PM
Dow Jones News
By Nick Timiraos
Federal Reserve officials are likely to keep interest rates
steady at their policy meeting this week and drill down into
details about when and how to reduce their large holdings of
mortgage and Treasury securities.
The challenge in their postmeeting policy statement will be to
acknowledge the handful of disappointing economic growth indicators
since officials last gathered in mid-March without suggesting they
are ready to veer from the policy path they have sketched out at
recent meetings. The two-day policy meeting begins Tuesday.
Officials raised interest rates at the March meeting to a range
between 0.75% and 1% and penciled in two more quarter-percentage
point increases this year. They also believe they are on course to
signal late in the year that they will begin winding down their
securities portfolio.
Gross domestic product grew at a 0.7% annual rate in the first
quarter, as consumers reined in spending despite a surge in
household confidence surveys and a rise in stock prices. The report
isn't likely to cause too much alarm at the Fed because of signs
temporary factors suppressed spending and because the economy in
recent years has slowed at the start of the year before picking up
speed in the spring and summer.
Inflation also weakened unexpectedly in March. The Labor
Department's consumer-price index declined a seasonally adjusted
0.3% in March from the prior month, and prices excluding food and
energy fell 0.1%, the first decline for so-called core prices since
2010.
Still, officials believe the economy is near full employment,
meaning inflation should slowly build in the months ahead. The
unemployment rate fell to 4.5% from 4.7%, hitting its lowest level
in almost a decade.
Fed officials have signaled in public statements and interviews
any disappointing data points haven't been enough to change their
rate outlook.
Given recent seasonal patterns, "something that looks like 1% in
the first quarter -- it might be actually more like 2% in reality,"
said New York Fed President William Dudley after a speech in New
York on April 7.
After years of pushing down on the gas pedal, the Fed's job now
is to allow "the economy to kind of coast and remain on an even
keel, to give it some gas, but not so much that we're pressing down
hard on the accelerator," said Fed Chairwoman Janet Yellen in
remarks on April 10 in Ann Arbor, Mich.
Continuing to gradually remove large amounts of stimulus "seems
likely both to maximize the prospects of a continued expansion in
the U.S. economy and to mitigate the risk of undesirable spillovers
abroad," said Fed Vice Chairman Stanley Fischer in remarks at a
conference in Washington on April 19.
Also, potential growth shocks from abroad, which forced the Fed
to scale back its plans to raise rates in 2015 and 2016, have held
at bay so far this year. More resilient global growth is making
officials less worried about the latest batch of somewhat
discouraging domestic data.
"The global economy, which was quite weak, now seems to be
operating in a slightly more robust and healthier way," Ms. Yellen
said in Ann Arbor.
With that as a backdrop, officials are comfortable with market
expectations about their next move. Traders in futures markets
placed a 63% probability on a Fed rate increase by then, according
to CME Group.
That is up from less than 50% before the first round of voting
in the French election on April 23. Markets rallied after centrist
candidate Emmanuel Macron advanced to the final round of voting on
May 7 against Marine Le Pen, the far-right nationalist who would
withdraw France from the European Union's common currency.
Financial conditions have been mixed since the Fed last met in
March. Stock markets have pulled back from their highs earlier this
year, while bonds have rallied, sending down yields. The 10-year
Treasury yield fell from 2.63% on March 13, its highest level of
the year, to 2.28% on Friday. A Goldman Sachs index shows that
taken altogether financial conditions eased in April to levels last
seen in August.
With the economy on better footing, officials are moving quickly
to fill in details about how they will address their $4.5 trillion
securities portfolio. That discussion began in earnest at the March
meeting but officials still need to work through myriad technical
details for how to reduce the portfolio, which was ramped up during
and after the financial crisis to provide added stimulus to the
economy.
Officials want their benchmark federal-funds rate to remain the
primary tool for managing monetary policy, meaning they would like
the balance-sheet wind-down to run quietly in the background once
they start the process. The official account of the March meeting
indicated officials were leaning toward gradually tapering the
reinvestments of principal payments on Treasury and mortgage
securities as opposed to stopping them cold turkey, but said no
decision had been reached.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
April 30, 2017 15:16 ET (19:16 GMT)
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