Fed Keeps Interest Rates Steady, Sees Inflation Improving
The Federal Reserve left its benchmark interest rate unchanged at 5.25% and said core inflation has "improved modestly," dropping its previous description that inflation as "elevated."
However, the Fed reiterated that its main concern was that inflation might fail to moderate.
"The Fed moved the ball on inflation by stating inflation has improved," said CNBC's Senior Economics Report Steve Leisman. "But have also moved the goal post by stating that improvements in inflation have yet to be sustained."
Changes in the Federal Funds Rate (since 2006)
|Jan 31, 2006||4.50||+ 0.25|
|Mar 28, 2006||4.75||+ 0.25|
|May 10, 2006||5.00||+ 0.25|
|Jun 29, 2006||5.25||+ 0.25|
|Sep 18, 2007||4.75||- 0.50|
According to the eagerly awated Fed statement, "economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.
"Readings on core inflation have improved modestly in recent months," the statement added. "However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
"In these circumstances," it added, "the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
Alfred Broaddus, former president of the Richmond Federal Reserve, told CNBC’s “Street Signs” that he believes the Fed recognized the progress that’s been made in reducing inflation.
“I think they were trying to do this cautiously because labor markets (are) tight,” Broaddus said. “…I think they wanted to be careful not to make too optimistic a statement about the long-run outlook for inflation.”
Robert Parry, former president of the San Francisco Federal Reserve, said the Fed remains focused on core inflation.
“I think the language they chose indicates that they have to be convinced in a meaningful way that sufficient progress has been made,” Parry said. “I certainly hope they are not content with the rate at 2% in terms of core (inflation). There are some indications here that may be the case – they’d like to see a range that is in the area of say 1% to 2% or some even say 1.5% to 2%, but 2% itself is not enough progress.”
Parry said the Fed sees no reason to change rates “for the foreseeable future.”
The decision by the central bank's Federal Open Market Committee keeps the overnight federal funds rate target at the level it hit in June last year after 17 straight quarter-percentage point increases.