Martin Crutsinger

Fed officials adjust rate strategy amid strengthening economy

WASHINGTON (AP) — Federal Reserve officials last month said they expect to keep raising interest rates and suggested that by next year, they could be high enough that they could start slowing growth, according to minutes of their discussion released July 5. While highlighting a strong economy, Fed officials appeared vigilant about emerging risks, especially trade tensions, and the dangers of an economy that might overheat. The officials noted heightened concerns from businesses about President Donald Trump’s get-tough trade policies and that some executives had already scaled back future spending plans because of the uncertainty. They also said they were monitoring changes in market-set interest rates. A narrowing in the gap between short-term and long-term rates has been an accurate predictor of downturns in the past. Economists said the minutes of the June discussions did not alter their overall view of what the Fed would do this year. “We continue to expect that fiscal stimulus will push the unemployment rate lower over time and lead the Fed to hike rates two more times this year, in September and December,” said Barclays economist Michael Gapin. The minutes covered the discussions at the Fed’s June 12-13 meeting in which the central bank boosted its key rate for a second time this year to a new range of 1.75 percent to 2 percent. Fed officials also increased their projection for the number of rate hikes they plan to make this year from three to four. The Fed dropped language it had been using for a number of years promising to keep rates at levels that would boost economic growth “for some time.” The change was made because officials believed it “was no longer appropriate in light of the strong state of the economy and the current expected path for policy,” the minutes said. Officials discussed the fact that under their expected path, its key policy rate, known as the federal funds rate, could be at or even above the neutral level — the point at which the rate is neither stimulating economic growth or holding it back. In the Fed’s latest projection, the neutral rate stood at 2.9 percent. But it forecast a higher benchmark rate of 3.1 percent by the end of next year. The projections have the funds rate rising to 3.4 percent by the end of 2020. As such, a number of officials believed it might soon be appropriate to drop the language in the policy statement indicating that the stance of monetary policy “remains accommodative.” That is the phrase the Fed uses to say that rates are still low enough to stimulate growth. Despite current growth prospects and inflation finally reaching the Fed’s goal of 2 percent annual gains in prices, the minutes noted a number of “risks and uncertainties” facing the economy. Officials said that the risks associated with trade policy had “intensified,” with the uncertainty potentially hurting business sentiment and investment spending.” The Trump administration has imposed tariffs on steel and aluminum imports. He has also threatened to impose tariffs on billions of dollars in other Chinese products, including tariffs on $34 billion in Chinese goods that took effect July 6. Beijing has promised to retaliate with tariffs on U.S. goods, including farm products such as soybeans. Trump has staked out a tougher approach on trade in an effort to achieve his goal of dramatically shrinking America’s huge trade deficits, which he has blamed for the loss of millions of U.S. factory jobs.

Fed raises key interest rate by a quarter-point

WASHINGTON (AP) — The Federal Reserve is raising its benchmark interest rate and signaling that it is sticking with a gradual approach to rate hikes under its new Chairman Jerome Powell. The Fed on March 21 boosted its key short-term rate by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent and said it will keep shrinking its bond portfolio. Both steps show confidence that the U.S. economy remains sturdy nearly nine years after the Great Recession ended. The actions mean consumers and businesses will face higher loan rates over time. The Fed’s rate hike marks its sixth since it began tightening credit in December 2015. It is sticking with the forecast it issued in December for three increases in 2018. But it did boost its 2019 estimate from two hikes to three. Speaking to Congress last month, Powell said his “personal outlook” on the economy had strengthened since December, when the Fed’s policymakers collectively forecast three rate hikes for 2018, the same as in 2017. That comment helped send stocks tumbling because it suggested that the Fed might be about to accelerate the gradual pace it had pursued under his predecessor, Janet Yellen. More aggressive rate increases would likely slow the economy and make stocks less appealing. Yet when he testified to Congress again two days later, Powell tempered his view: He stressed that the Fed still thinks it has room to maintain a moderate pace of rate hikes, in part to allow Americans’ average wages, which have stagnated for years, to pick up. The impression was that he might not favor raising rates faster than Yellen did after all — at least not yet. A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates. The financial markets have been edgy for weeks, and Powell’s back-and-forth comments have been only one factor. A sharp rise in wage growth reported in the government’s January jobs report triggered fears that higher labor costs would lead to higher inflation and, ultimately, to higher interest rates. Stocks sank on the news. But subsequent reports on wages and inflation have been milder, and the markets appear to have stabilized. The February jobs report pointed to an unusually robust labor market: Employers added 313,000 jobs, the largest monthly gain in 1½ years. The unemployment rate remained at a 17-year low of 4.1 percent. Other measures of the economy, though, have been more sluggish. Consumer spending, the economy’s primary fuel, has slowed this year and has led many economists to downgrade their forecasts for growth in the January-March quarter. Some now envision an annual growth rate of just 1.7 percent for the quarter. Forecasts for all of 2018, though, still predict an acceleration later this year, driven in part by the stimulative effect of the sweeping tax cuts President Donald Trump pushed through Congress in December and a budget agreement last month to raise government spending by $300 billion over two years. If economic growth does pick up and the job market remains healthy, the Powell Fed is viewed as likely to accelerate its rate hikes, from the three it projected in December to four this year. Even after six rate increases over the past 27 months, the Fed’s benchmark rate remains in a still-low range of 1.5 percent to 1.75 percent, up from a record low near zero as recently as December 2015. The Fed’s slighter higher key rate has, however, contributed to higher consumer loan rates, including for home mortgages. Some economists say they think Powell will try to demonstrate at the start of his tenure that he is serious about keeping inflation under control, a central responsibility for any Fed leader.

Fed chair nominee favors easing rules that hurt small banks

WASHINGTON (AP) — Jerome Powell, President Donald Trump’s pick to be chairman of the Federal Reserve, told senators at his confirmation hearing Nov. 28 that he believes some bank regulations can be rolled back — something the administration and Wall Street favor. But he stressed that he will protect the central bank’s political independence, calling it vital for the Fed’s role. Powell also strongly hinted in his appearance before the Senate Banking Committee that the Fed would hike rates again in December. Powell said he believed that the Dodd-Frank Act, passed in the wake of the devastating 2008 financial crisis, had succeeded in making the financial system stronger, including ensuring that no major institution now is too big to fail. But in some areas such as regulation of smaller banks, the law had imposed unnecessary burdens that should be eased, he said. Powell’s comments pleased many GOP senators, who have complained for years that Dodd-Frank was hurting the economic recovery by making it harder to get bank loans. Democratic senators, however, pressed Powell to say whether he would cut key consumer protections in the 2010 law, a measure that Trump often attacked on the campaign trail as a disaster. Powell stressed that he was “strongly committed” to the political independence of the Federal Reserve. He said he has not had any conversation with anyone in the administration that concerned him. During two hours of testimony, Powell sought to convey a sense of stability and praised his predecessors Janet Yellen and Ben Bernanke. He said that the Fed would continue on a gradual path of raising interest rates and shrinking the Fed’s massive $4.5 trillion balance sheet, which grew five-fold in the wake of the Great Recession as the Fed bought government bonds to push long-term interest rates lower. Powell said he expected the balance sheet to shrink to around $2.5 trillion to $3 trillion over the next three to four years under a program set in motion by Yellen. On interest rates, Powell said, “I think the case for raising interest rates at our next meeting is coming together.” When pressed for specifics on a December rate hike, Powell deferred, citing Fed policy not to talk about possible outcomes before officials gathered and heard all views. Trump tapped Powell on Nov. 2 to succeed Yellen, the first woman to head the nation’s central bank and the first Fed leader in four decades not to be offered a second term as chair. Yellen’s term ends on Feb. 3. She said last week she will leave the Fed once Powell is confirmed by the Senate. Private economists said there were no surprises in Powell’s testimony. He sought to bolster the reputation he built in his five years as a Fed board member as a centrist in pursuit of the Fed’s dual goals of promoting maximum employment and stable prices. “I have had the great privilege of serving under Chairman Bernanke and Chair Yellen and, like them, I will do everything in my power to achieve those goals while preserving the Federal Reserve’s independent and nonpartisan status that is so vital to their pursuit,” he said. Michael Pearce, U.S. economist at Capital Economics, said Powell gave “away little new on either the economic or policy outlook.” There was little market reaction to Powell’s testimony, although some big bank stocks did move up, as investors cheered his comments that some bank regulations could be loosened. The Yellen Fed has raised rates four times starting in December 2015, including two rate hikes this year. Economists expect a third rate hike to occur next month, and they’re projecting at least three additional rate increases in 2018. On other topics: • Powell dodged a number of questions posed by Democrats about whether it would be a wise move for Congress to boost budget deficits by $1.5 trillion over the next decade by passing tax cuts being pushed by Republicans and the Trump administration. Powell said the Fed would assess the impact of any tax cuts on the economy once the final package had won congressional approval. • He predicted that the economy would grow by 2.5 percent this year and around that level next year, considerably better than last year’s performance. • Powell said there was still slack in the labor market and that the Fed could allow unemployment, already at 4.1 percent — the lowest level in nearly 17 years — to fall below 4 percent.

Fed perplexed by chronically low inflation

CLEVELAND (AP) — Federal Reserve Chair Janet Yellen acknowledged Sept. 26 that the Fed is puzzled by the persistence of unusually low inflation and that it might have to adjust the timing of its interest rate policies accordingly. Speaking to a conference of economists, Yellen touched upon key questions the Fed is confronting as it tries to determine why inflation has remained chronically below its target of 2 percent annually. The Fed chair said officials still expect the forces keeping inflation low to fade eventually. But she conceded that the Fed may need to adjust its assumptions. In noting the persistence of low inflation, Yellen suggested that the Fed will take care not to raise rates too quickly. But she also said the central bank should avoid raising rates too slowly. Moving too gradually, she suggested, might eventually force the Fed to have to accelerate rate hikes and thereby elevate the risk of a recession. Most analysts expect the central bank to raise rates in December, for a third time this year, in a reflection of economic improvement. But the Fed has said its rate hikes will depend on incoming data. In her speech in Cleveland to the annual conference of the National Association for Business Economics, Yellen went further than she has before in suggesting that the Fed could be mistaken in the assumptions it is making about inflation. “My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective or even the fundamental forces driving inflation,” Yellen said. The Fed seeks to control interest rates to promote maximum employment and stable prices, which it defines as annual price increases of 2 percent. While the Fed has met its goal on employment, with the jobless rate at 4.4 percent, near a 16-year low, it has continued to miss its inflation target. Chronically low inflation can depress economic growth because consumers typically delay purchases when they think prices will stay the same or even decline. Inflation, which was nearing the 2 percent goal at the start of the year, has since then fallen further behind and is now rising at an annual rate of just 1.4 percent. Yellen has previously attributed the miss on inflation this year to temporary factors, including a price war among mobile phone companies. She and other Fed officials have predicted inflation would soon begin rising toward the Fed’s target, helped by tight labor markets that will drive up wage gains. In her remarks Sept. 26, Yellen said this outcome of a rebound in inflation is still likely. But she said the central bank needed to remain alert to the possibility that other forces not clearly understood might continue to keep inflation lower than the Fed’s 2 percent goal. The Fed chair cautioned that if the central bank moved too slowly in raising rates, it could inadvertently allow the economy to become overheated and thus have to raise rates so quickly in the future that it could push the country into a recession. “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” Yellen said. During a question-and-answer session, Yellen said the Fed would be “looking at inflation very carefully” to determine the timing of upcoming rate hikes. But she said the data is likely to be difficult to assess, in part because of the effects of the recent devastating hurricanes, which have forced up gasoline prices. Yellen’s remarks came a week after Fed officials left their benchmark rate unchanged but announced that they would start gradually shrinking their huge portfolio of Treasury and mortgage bonds. Those holdings had grown from purchases the Fed made over the past nine years to try to lower long-term borrowing rates and help the U.S. economy recover from the worst downturn since the 1930s. The Fed did retain a forecast showing that officials expect to boost rates three times this year. So far, they have increased their benchmark lending rate twice, in March and June, leaving it at a still-low range of 1 percent to 1.25 percent. Last week, the Fed said the reductions in its bond holdings would begin in October by initially allowing a modest $10 billion in maturing bonds to roll off the $4.5 trillion balance sheet each month. Asked about how long-term loan rates might respond to reductions in the Fed’s bond portfolio, Yellen cited a study that estimated that the increase in its bond holdings had lowered such rates by about 1 percentage point. But she said the reduction in the holdings wouldn’t likely raise rates by as much as a percentage point given that the Fed intended to keep the size of its balance sheet significantly higher than it was before the financial crisis. She said any upward pressure on rates would likely be gradual and take place over several years. Later, Yellen toured a job training center operated by Cuyahoga Community College and participated in a roundtable with students, faculty and potential employers. Yellen, who has visited a number of job centers during her time as Fed chair, told the group that job training was especially important now as employers find it harder in a tight labor market to find workers with the necessary skills.

Fed official: Bond portfolio could shrink soon

NEW YORK (AP) — A top Federal Reserve official suggested Aug. 14 that the Fed will likely announce next month that it will begin paring its bond portfolio — a step that could lead to slightly higher rates on mortgages and other loans. In an interview with The Associated Press, William Dudley, president of the Federal Reserve Bank of New York, said he thinks the Fed has adequately prepared investors for a reduction in the portfolio, which swelled after the 2008 financial crisis as the Fed bought bonds to reduce long-term rates. With the economy now much healthier, the Fed is ready to begin trimming its bond holdings. Dudley also said that he would favor a third increase this year in the Fed’s benchmark short-term rate if the economy remained strong. Many investors expect a modest rate hike in December, to follow the Fed’s previous increases in March and June this year. Speaking of the Fed’s likely September announcement that it will begin shrinking its $4.5 trillion bond portfolio, Dudley expressed confidence that investors would react calmly to the prospect of modestly higher rates on some consumer and business loans. He noted that the Fed spelled out to investors months ago the system it plans to use to reduce the portfolio gradually. “The plan is out there,” he said during an interview at the New York Fed. “It’s been generally well-received and fully anticipated. People expect it to take place.” As president of the Fed’s New York regional bank, Dudley is an influential voice on interest-rate policy. He is vice chairman of the central bank’s policy panel that sets interest rates and is a longtime close ally of Fed Chair Janet Yellen. His interview with the AP comes at a time when the Fed has essentially met one of its two mandates: To maximize employment. The unemployment rate is at a 16-year low of 4.3 percent, and job growth remains consistently solid. Yet the Fed has so far failed to meet its second objective of keeping prices stable. Inflation has stayed chronically below the Fed’s 2 percent target rate — a problem because consumers often delay purchases when they think prices will stay the same or even decline. In its latest reading, the Fed’s preferred inflation gauge was just 1.4 percent year-over-year. Dudley said Aug. 14 that he still thinks inflation will rise toward the Fed’s target level as the job market strengthens further and sluggish wage growth begins to pick up. On other topics, Dudley: • Suggested that Gary Cohn, who leads President Donald Trump’s National Economic Council and is close to Trump, would be a “reasonable candidate” to succeed Yellen as Fed chair if Trump chooses not to re-nominate Yellen when her term ends early next year. Dudley, who worked with Cohn as top officials at Goldman Sachs, said Cohn “knows a lot about financial markets,” and “I don’t think you have to have a Ph.D. in economics” to lead the Fed. In a recent interview, Trump said he was considering both Yellen and Cohn for the top Fed job, along with some other candidates he would not name. • Expressed confidence that the Fed’s political independence, long considered essential for it to carry out its functions, would remain respected during a Trump presidency. Trump may have the opportunity to install up to five members of the Fed’s seven-member board over the next year, and the president has shown a tendency to expect loyalty from some people he has named to key positions. Trump had offered a harsh judgment of the Fed and of Yellen during the presidential campaign but has since avoided making critical comments. Dudley noted that the Trump administration has so far been “very hands-off” toward the Fed, “very respectful of the monetary policy.” • Said that even as stock prices set record highs and other assets surge as well, he isn’t concerned that any potentially devastating asset bubbles might be forming, akin to the subprime mortgage bubble that triggered the 2008 crisis. Dudley said asset prices “are pretty consistent with what we are seeing in terms of the actual performance of the economy,” which he said has been evolving without much volatility. • Acknowledged that policymakers need to be “somewhat humble” about how the forthcoming reduction in the Fed’s bond portfolio might affect financial markets and loan rates. Dudley noted that the Fed has never before had to pare a balance sheet that has grown five-fold to $4.5 trillion. But he said officials have learned from the 2013 “taper tantrum” that rocked markets after a surprise announcement from the Fed, and has sought to telegraph all its actions well in advance. The Fed’s announcement that it will start paring its bond portfolio is expected to come after its next policy meeting ends Sept. 20. The meeting after that, in December, is when many Fed watchers expect the next increase in its key short-term rate, which remains in a still-low range of 1 percent to 1.25 percent. Yellen and other Fed officials have attributed the persistently low inflation rate, which slowed further in recent months, to such transitory events as a sharp drop in cellphone fees. Dudley said that if the economy evolves during the rest of 2017 as he expects, with inflation rebounding, “I would be in favor of doing another rate hike later this year.”

Rates unchanged, but signals hikes ahead

WASHINGTON (AP) — The Federal Reserve has left interest rates unchanged while signaling that it expects a resilient U.S. economy and solid job market to justify further rate hikes later this year. A statement the Fed issued May 3 after its latest policy meeting noted that the economy slowed sharply during the January-March quarter but that it expects that slump to be “transitory.” The Fed’s pause in raising rates comes after it modestly lifted its benchmark short-term rate in December and March. Most economists expect it to do so again when it next meets in mid-June. Nearly eight years after the Great Recession ended, the unemployment rate is a low 4.5 percent. Key gauges of the economy — from home sales to consumer confidence to the stock market — appear robust. Still, consumer spending and factory output have slowed, and inflation remains below the Fed’s target rate. The Fed is in the midst of a campaign to gradually raise interest rates from ultra-lows. One reason for it to stand pat this week is that even though the job market has shown steady strength, the economy itself is still growing in fits and starts. On April 28, the government estimated that the economy, as gauged by the gross domestic product, grew at a tepid 0.7 percent annual rate last quarter. It was the poorest quarterly performance in three years. Though some temporary factors probably held back growth last quarter and might have overstated the weakness, the poor showing underscored that key pockets of the economy remain sluggish. On May 1, the government said consumer spending stalled in March for a second straight month. And the Institute for Supply Management reported a drop in factory activity. Most economists have expressed optimism that the economy is strengthening in the current April-June quarter, fueled by job growth, higher consumer confidence and stock-market records. Many think that annualized growth could accelerate to around 3 percent and that the Fed will soon feel confident to resume raising rates. The global economic picture has also brightened somewhat. It isn’t just the Fed’s short-term rate — a benchmark for other borrowing costs throughout the economy — that likely occupied attention at this week’s meeting. Officials probably also discussed how and when to start paring their extraordinary large $4.5 trillion portfolio of Treasurys and mortgage bonds. The Fed amassed its portfolio — commonly called its balance sheet — in the years after the financial crisis erupted in 2008, when it bought long-term bonds to help keep mortgage and other borrowing rates low and support a frail economy. At the time, the Fed had already cut its short-term rate to a record low. The balance sheet is now about five times its size before the financial crisis hit. The Fed stopped buying new bonds in 2014 but has kept its balance sheet high by reinvesting the proceeds of maturing bonds. The Fed’s thinking has been that reducing the balance sheet could send long-term rates up and work against its goals of fortifying the economy. Now, as the Fed becomes more watchful about inflation pressures, the time is nearing when it will need to shrink its balance sheet, a process that could have the effect of raising some borrowing rates, at least modestly. The Fed jolted investors when it released the minutes of its March meeting, which showed that most officials thought that process would be appropriate later this year. This was sooner than many investors expected. The Fed didn’t clarify its timetable for paring its balance sheet in the statement it issued May 3. The statement said, as it has before, that the Fed doesn’t expect to begin reducing its bond holdings until its rate increases are under way. One reason the Fed didn’t say more about its expectations for its balance sheet might have been that this week’s meeting wasn’t accompanied by a news conference with Chair Janet Yellen to explain any shifts in the Fed’s policy or thinking. Yellen will hold a news conference after the Fed’s next meeting ends June 14. Some Fed officials have suggested that they would prefer not to be raising the short-term rate at the same time that they are beginning to reduce their balance sheet. Giving investors too much to digest at once risks unsettling financial markets. In 2013, the Fed triggered a brief storm in bond markets when then-Chairman Ben Bernanke raised the possibility that the Fed would start tapering its bond purchases later that year, catching investors by surprise. It’s also possible that the Fed chose not to reveal anything May 3 about its timetable for reducing its balance sheet, in part because the policy committee has yet to reach a consensus on when or how to do so.

Fed keeps key rate unchanged but hints of hike

WASHINGTON (AP) — The Federal Reserve is keeping its key interest rate unchanged but signaling that it will likely raise rates before year's end. The Fed said in a statement ending its latest policy meeting Sept. 21 that the U.S. job market has continued to strengthen and economic activity has picked up. But it noted that business investment remains soft and inflation too low and that it wants to see further improvement in the job market. The central bank characterized the near-term risks to its economic outlook as "roughly balanced." It was the first time it has used that wording since late last year, when it most recently raised rates. Most analysts have said they think the Fed will next raise rates in December. In its statement, the Fed said its policy committee concluded 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." For the first time in nearly two years and for the first time since Janet Yellen became Fed chair in February 2015, there were three dissents to the Fed's statement. The three officials are all presidents of regional Fed banks — Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston. All wanted the Fed to raise its key rate at this meeting. The Fed's next meeting is just a week before the November elections, and most analysts think it wouldn't want to raise rates so close to when voters go to the polls. That's why the last meeting of the year in December is seen as the most likely time for the next rate hike as long as the economy keeps improving in line with the Fed's expectations. On Sept. 21, the Fed also issued updated economic forecasts, which reduced its expectation for rate increases this year to one from two. The Fed now expects two rate increases in 2017 and two in 2018, down from three each year in previous forecasts. And it lowered its expectation for the long-range level of its key policy rate to 2.9 percent, down from 3 percent in June and 3.5 percent before then. Until recently, many Fed watchers had thought that a rate hike was likely this week. They believed that the Fed, starting with a late-August speech by Yellen in Jackson Hole, Wyo., was preparing investors for an imminent increase. Yellen suggested then that given the job market's solid gains and the Fed's outlook for the economy and inflation, "the case for an increase in the federal funds rate has strengthened in recent months." Other Fed officials, including Vice Chairman Stanley Fischer, made similar observations, seemingly part of a collective signal that a September rate hike was probable if not definite. Sentiment shifted, though, after Lael Brainard, a Fed board member and Yellen ally, laid out the case for delaying a resumption of rate increases for now. Brainard's comments, coupled with a string of weaker-than-expected economic data, led watchers to conclude that there will likely be no rate increase this week. Still, many analysts had expected the statement the Fed released Sept. 21 to signal that modestly higher lending costs were coming soon — in part to satisfy the growing number of Fed officials who have pushed for a resumption of rate increases. Some economists had pointed to the minutes of the Fed's July meeting and comments from officials since then to suggest that the central bank's "hawks" — those who think it should be acting faster to raise rates — are gathering adherents from the dove camp. Doves tend to be wary of raising rates quickly for fear for undermining growth. Others said that members of the dove camp, who include Yellen, weren't yet convinced, especially after the recent string of tepid readings on the economy. Job growth slowed in August. A manufacturing gauge slid back into recession territory. An index that tracks the services economy, where most Americans work, fell to its lowest level since 2010. U.S. shoppers retreated in August to depress retail sales after four straight monthly gains. These were signs, too, that the economy might be struggling to accelerate after three straight quarters of anemic growth. And perhaps most critical for some Fed officials, inflation has yet to make significant progress in rising toward the central bank's 2 percent target range. The Fed's statement Sept. 21 was issued hours after the Bank of Japan, struggling to rejuvenate an ailing economy, set a more ambitious goal for raising inflation and announced steps meant to raise the profitability of financial firms. Analysts expressed doubt, though, that the Bank of Japan's new target would change the mindset of shoppers and businesses long used to a stagnant economy and flat or declining prices. They said they expected Japan's central bank to eventually slash its policy rate further. In Europe, Mario Draghi, head of the European Central Bank, is seeking help from the governments of the 19 counties that use the euro currency. The ECB this month left its aggressive stimulus measures unchanged and urged European governments to spend more on infrastructure and to enact reforms to make their economies more efficient and business-friendly. The eurozone economy is growing slowly, but inflation remains well far below the ECB's 2 percent annual target.

Federal Reserve keeps rates steady but sees less risk to US economy

WASHINGTON (AP) — The Federal Reserve kept interest rates unchanged July 27 but sounded a positive note: Near-term risks to the economy, the Fed said, have diminished. It noted that the U.S. job market has rebounded, with robust hiring in June after a deep slump in May. At the same time, the Fed said in a statement after its latest policy meeting that it plans to closely monitor global economic threats and financial developments to ensure that they don’t slow the economy. The Fed seemed to be referring in particular to Britain’s vote last month to leave the European Union — a move that poses risks to the rest of Europe and to the global economy. The central bank gave no hint of when it might resume the rate hikes it began in December, when it raised its benchmark rate from a record low. Some analysts who had doubted that the Fed would be ready to raise rates as soon as September said Wednesday’s statement appeared to revive that possibility. “The Fed is saying that near-term risks have diminished, so that certainly puts September back in play,” said Brian Bethune, an economics professor at Tufts University. Bethune said he still thought the Fed would wait until December before raising rates but that a September move was possible if hiring remains strong and the global economy and markets remain stable. Greg McBride, chief financial analyst at Bankrate.com, noted that “the Fed gave a very upbeat assessment of the U.S. economy, which is the first step toward prepping markets for another rate hike.” Some also suggested that the Fed’s brighter outlook suggests that it’s become less concerned that a British exit from the EU — commonly dubbed “Brexit” — would seriously undermine the U.S. or global economy. The statement signals that the Fed “does not think that Brexit will be a significant hindrance for the U.S. economy,” said Carl Tannenbaum, chief economist at Northern Trust. Stock averages posted a modest increase after the statement was issued at 2 p.m. Eastern time, with investors seemingly encouraged by the Fed’s more positive assessment of the economy. The yield on the 10-year Treasury note dipped from 1.53 percent to 1.51 percent. The decision to leave its key rate unchanged in a range of 0.25 percent to 0.5 percent was approved on a 9-1 vote. Esther George, the president of the Fed’s Kansas City regional bank, dissented for the third time this year, arguing for an immediate quarter-point rate hike. A few months ago, it was widely assumed that the Fed would have resumed raising rates by now. But that was before the U.S. government issued the bleak May jobs report and Britain’s vote last month to quit the EU triggered a brief investor panic. Since then, though, a resurgent U.S. economy, the bounce-back in hiring and record highs for stocks have led many economists to predict a Fed move by December if not sooner. In June, employers added 287,000 jobs, the most since October 2015. In December, when the Fed raised its benchmark rate from a record low near zero, it also laid out a timetable for up to four additional rate hikes this year. But intensified fears about China’s economy and a plunge in oil prices sent markets sinking and led the Fed to delay further action. Once the markets stabilized, the Fed signaled a likely rate increase by midyear. Anemic hiring in April and May, though, raised concerns, and it left rates alone. The central bank was also affected by Britain’s forthcoming vote on whether to leave the EU, anticipation of which had rattled investors. Now, though, the pendulum has swung back, especially after the arrival of a reassuring June jobs report. The Standard & Poor’s 500 stock index had plunged 5.3 percent in the two trading days after Britain’s vote. It has since regained all those losses — and set new highs. The economy is also picking up after the year’s anemic start. Stronger consumer spending is thought to have lifted growth, as measured by the gross domestic product from the January-March quarter to the April-June quarter, with further acceleration expected later this year. In the spring, consumers boosted spending at the fastest pace in a decade. Economists also foresee a lift from business investment, reflecting a rebound from cutbacks in the energy sector. All that strength might argue for September rate hike, especially if monthly job growth equals as least 200,000 between now and then. Still, the risks of raising rates again too soon and possibly choking off economic activity may seem greater to the Fed than the risks of waiting longer. It has room to accelerate its rate increases if the economy were to heat up so much as to ignite high inflation.  

Fed keeps key rate unchanged; no hint on timing of next hike

WASHINGTON (AP) — The Federal Reserve kept a key interest rate unchanged Wednesday against the backdrop of a slowdown in U.S. and global growth and provided no hint of when its next rate hike may occur. In a statement after its latest policy meeting, the Fed noted that the United States is enjoying solid job gains but also that "economic activity appears to have slowed." The Fed said that such key areas as consumer spending, business investment and exports have weakened. At the same time, it expressed less alarm about global economic conditions than it had after its previous meeting in March. In March, the Fed had cautioned that global developments "pose risks." In Wednesday's statement, it no longer mentioned such risks, though it said it would "closely monitor" global economic and financial developments. The Fed repeated that it expects inflation to move toward its 2 percent target from persistently low levels as temporary factors, like sharply lower energy prices, fade. "The softness in U.S. economic data to start 2016 gave the Fed plenty of cover to hold off on further rate hikes now, and they held their cards close to the vest regarding upcoming meetings," said Greg McBride, chief financial analyst at Bankrate.com. Investor reaction to the Fed's announcement, which was in line with expectations, was muted. Bond prices rose slightly, sending yields moderately lower. Stock indexes were mixed and traded about where they were before the Fed released its latest policy statement at 2 p.m. Eastern time. The Fed's decision was approved on a 9-1 vote, with Esther George, head of the Fed's regional bank in Kansas City, dissenting for a second straight meeting. As in March, George argued for an immediate rate hike. The Fed didn't rule out a rate hike at its next meeting in June. But neither did it say anything to prepare investors for such action. In October, the Fed had said in a post-meeting statement that it would decide whether it would be "appropriate" to raise rates at its subsequent meeting in December, at which point it did increase rates from record lows. Economists have suggested that the Fed will likely again insert such language into the statement that will precede its next rate hike to prepare investors and ensure an orderly market response. Still, Paul Ashworth, chief U.S. economist at Capital Economics, said that while the Fed didn't signal a rate hike in June, its lessened concern about global risks suggests it's still leaving the door open for a June hike. "Whether the Fed follows through will depend on what happens in financial markets over the next six weeks," Ashworth said. The Fed took note of a slowdown in U.S. growth during the first quarter of the year. Its statement said consumer spending has moderated even though incomes have been growing solidly. The statement also observed that business investment spending and exports have weakened. Business investment has been hurt by the plunge in oil prices, which has triggered spending cuts at energy companies. And exporters have struggled with a strong dollar, which has made American goods costlier overseas. In December, when the Fed raised its benchmark rate, it signaled that it expected four more rate hikes in 2016. In March, it revised that expectation to just two hikes. And some economists say it might not raise rates again before the second half of the year. A slowdown in China, the world's second-largest economy after the United States — has already hurt the developing world. Europe is straining to gain momentum, and Japan is hobbled by wary consumers and an aging population. On Thursday, the government is expected to estimate that the U.S. economy grew at a tepid annual rate under 1 percent in the January-March quarter. Some forecasters think growth might have been as weak as 0.3 percent, which would mean the economy nearly stalled out last quarter. What's more, U.S. inflation is running well below the Fed's optimal level of 2 percent. In the meantime, far from considering rate hikes, other major central banks are weighing steps to further ease credit, increase inflation and bolster growth. On Thursday, for example, when the Bank of Japan meets, a key topic will be what else it might do to fight economic weakness, raise inflation and blunt a rise in the yen's value against the dollar, which hurts Japan's exporters. In January, in a desperate bid to raise inflation, Japan's central bank introduced negative rates. Yet inflation and growth remain stuck near zero. Last week, Mario Draghi, head of the European Central Bank, made clear he was ready to launch more stimulus efforts if needed to energize the eurozone economy. That pledge came after the ECB had already expanded its stimulus programs in March. China's sliding economy has stabilized after worries about its growth had rocked financial markets in January. But now, a new challenge has raised international concerns: A June 23 referendum in which Britain will decide whether to leave the European Union. World leaders have warned that a British exit from the EU could threaten the global economy. Because that vote will occur just a week after the Fed's June 14-15 meeting, some analysts have suggested that the U.S. central bank would avoid any rate hike in June for fear it could rattle markets ahead of the British vote.  

As oil falls, US consumer prices down 0.1 percent in December

WASHINGTON (AP) — U.S. consumer prices fell in December and rose by the smallest amount in seven years in 2015, reflecting the toll of slumping energy costs. Consumer prices slipped 0.1 percent last month after a flat reading in November, the Labor Department reported Jan. 20. For the entire year, overall inflation was up just 0.7 percent, even smaller than a 0.8 percent rise in 2014. Both years were heavily influenced by plunging energy prices. It was the weakest annual increase since a 0.1 percent rise in 2008. Core inflation, which excludes volatile energy and food costs, edged up 0.1 percent in December. That was the smallest monthly gain since August. For the full year, core inflation was up 2.1 percent after a 1.6 percent rise in 2014. Energy prices and a stronger dollar have been major factors holding down inflation. The Federal Reserve, however, last month boosted a key interest rate for the first time in nine years, saying it believed inflation would eventually strengthen. The quarter-point increase pushed the federal funds rate from near zero to a range of 0.25 percent to 0.5 percent. Fed officials have stressed that the pace of future rate increases will be heavily dependent on signs that inflation is beginning to accelerate closer to the Fed’s target of 2 percent annual price gains. But since the Fed met last month, oil prices have declined further. That suggests it might take even longer for the Fed to hit its target. For December, energy prices fell 2.4 percent and are down 14.9 percent for the year. Food costs declined 0.2 percent and are up a modest 0.8 percent for the year. The nationwide average for a gallon of gasoline is down to $1.88, 12 cents lower than a month ago. But some analysts see the uptick in core inflation as a sign that inflation outside of energy and food is beginning to accelerate. The 2.1 percent rise in the core for the 12 months ending in December followed a 12-month rise of 2 percent in November. It was the largest 12-month gain in core prices since a similar 2.1 percent increase in July 2012. Driving core inflation in December were increases for shelter costs, medical care, home furnishings and education. Meanwhile, prices for clothing, airline fares and new cars declined in December. Laura Rosner, an economist with BNP Paribas, said that she is forecasting overall inflation will rise by 1.4 percent in 2016. The potential for further declines in energy and food costs, however, may pull her projection lower. The Fed next meets on Jan. 26-27, and private economists widely believe that the Fed will leave rates unchanged. Some economists say it could be June before the Fed raises rates again.  

Fed raises its key interest rate from record low near zero

WASHINGTON (AP) — The Federal Reserve is raising interest rates from record lows set at the depths of the 2008 financial crisis, a shift that heralds modestly higher rates on some loans. The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels. Wednesday's action signaled the central bank's belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand modestly higher borrowing rates. "The Fed's decision today reflects our confidence in the U.S. economy," Chair Janet Yellen said at a news conference. The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. But the Fed's statement suggested that rates would remain historically low well into the future, saying it expects "only gradual increases." "The Fed reaffirmed that the pace of rate hikes would be slow," James Marple, senior economist at TD Economics wrote in a research note. "The Fed's expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook." Stocks closed up sharply higher. The Dow Jones industrial average, which had been up modestly before the announcement, gained 224 points, or 1.3 percent, for the day. The bond market didn't react much. The yield on the 10-year Treasury note rose slightly to 2.29 percent. Rates on mortgages and car loans aren't expected to rise much soon. The Fed's benchmark rate doesn't directly affect them. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys. But rates on some other loans, like credit cards and home equity credit lines, will likely rise, though probably only slightly as long as the Fed's rate hikes remain modest. Shortly after the Fed's announcement, major banks began announcing that they were raising their prime lending rate from 3.25 percent to 3.50 percent. The prime rate is a benchmark for some types of consumer loans such as home equity loans. Wells Fargo was the first bank to announce the rate hike. Among other things, the Fed's low-interest rate policies have helped jump-start auto sales, which are on track to reach a record 17.5 million this year. And the Fed's first hike may not slow them. Steven Szakaly, chief economist for the National Automobile Dealers Association, says dealers will press financing companies to keep loan rates low. And competition for buyers will spur them to take other steps to hold down rates, such as accepting lower profits. "The rate squeeze will happen between the dealer and its finance company rather than the dealer and the consumers," Szakaly said. "Consumers won't even feel it." For months, Yellen and other Fed officials have said they expected any rate hikes to be small and gradual. But nervous investors have been looking for further assurances. Yellen indicated that Wednesday's rate hike was partially defensive. If rates stayed at near zero, the Fed might not have the tools to combat a recession. "We've worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks," she said at her news conference. When growth struggles, the Fed often cuts rates to help increase the amount of cash flowing through the economy. But by staying close to zero, the Fed would be unable to cut rates or it would be forced to have negative rates for the first time in its history. An updated economic forecast released with the policy statement showed that Fed officials predict that their target for the federal funds rate — the rate that banks charge on overnight loans — will end next year slightly above 1 percent. That is in line with the consensus view of economists. The Fed's action was approved by a unanimous vote of 10-0, giving Yellen a victory in achieving consensus. The statement struck a generally more upbeat tone in its assessment of the economy. It cited "considerable improvement" in the job market. And it expressed more confidence that inflation, which has been running well below the Fed's 2 percent target, would begin rising. It suggested this would happen as the effects of declines in energy and import prices fade and the job market strengthens further. In addition to the funds rate, the Fed is raising three other rates: It lifted the interest it pays on the reserves that banks hold at the Fed to 0.5 percent from 0.25 percent. It raised the rate it pays on a type of short-term loan to 0.25 percent from 0.05 percent. The Fed plans to use those two rates to help meet its new higher target for the funds rate. In addition, it announced a quarter-point increase in its discount borrowing rate to 1 percent from 0.75 percent. This is the rate banks pay when they borrow emergency loans from the central bank. This rate typically moves up in conjunction with the Fed's benchmark rate. ___ AP Business Writers Paul Wiseman and Josh Boak in Washington and Tom Krisher in Detroit contributed to this report.  
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