The Federal Reserve said it believes the recent slowdown in US growth is likely to prove temporary as it stayed on course for a further increase in short-term interest rates as soon as this summer.
The US central bank kept its target range for the federal funds rate at 0.75 per cent to 1 per cent following its latest two-day meeting. In a statement, policymakers led by chair Janet Yellen acknowledged that household spending growth had grown “only modestly” lately, but they emphasized that the “fundamentals” behind consumption growth remained solid.
US economic growth slowed to an annual rate of just 0.7 per cent in the opening quarter of the year, and core inflation has subsided marginally even as the jobs market continues to progress towards full employment.
The Fed lifted rates by a quarter point at its March 15 meeting and signaled that it expects a total of two more increases in 2017.
In its latest statement, the Federal Open Market Committee said: “The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labour market conditions will strengthen somewhat further, and inflation will stabilise around 2 per cent over the medium term.”
Going into Wednesday’s meeting the markets were putting the chances of another quarter-point rate rise in the June 13-14 meeting at more than 66 per cent, according to analysis of futures trading from CME Group.
A series of indicators have undershot expectations in recent weeks, while the prospect of tax cuts giving the US economy a near-term boost has ebbed. However it would likely take a sharper slowdown to convince the Fed that its broader strategy for reducing its stimulus is too aggressive.
The Fed has played down the significance of GDP numbers, which can be volatile and are also influenced by seasonal factors. The labour market has continued to perform robustly, with unemployment dropping to 4.5 per cent according to the latest report.
Inflation has been sluggish, with the core rate of price growth tracked by the Fed easing to 1.6 per cent year-on-year. The Fed noted the slowdown in inflation in its statement while pointing out that the 12-month rate of headline price growth remained close to its 2 per cent target. It said that core price growth, which strips out food and energy, has continued to run “somewhat” below 2 per cent following a March decline.
The Fed did not offer an explicit signal that a second 2017 rate increase is imminent, keeping existing language describing the risks to the outlook as roughly balanced. The statement suggested the central bank wishes to keep its options open as it watches the economy evolve, but that a pickup after the soft first quarter could tee up a move as soon as June.
The US central bank has been discussing how to pare back a $4.5tn balance sheet swollen by crisis-era interventions. The Fed’s portfolio grew radically during the crisis as policymakers purchased treasuries and mortgage-backed securities in a bid to underpin growth.
The Fed has suggested that it expects to start the process of trimming its asset holdings later this year if the economy stays on track, in a sign of rate-setters’ confidence in the economy. It did nothing to change its pre-existing language on balance sheet strategy, saying it would keep reinvesting the proceeds of maturing securities until the normalization of interest rates was “well under way.”