Economy

Fed leaves rates unchanged in June meeting

Fed leaves rates the same
VIDEO3:2703:27
Fed leaves rates the same

Amid worries about slowing job growth, Federal Reserve officials remain only tentatively committed to two more rate hikes this year, and provided indications Wednesday that there might be only one.

As widely expected, the Federal Open Market Committee declined to raise its interest rate target at this week's two-day meeting from the current 0.5 percent. While the so-called dot plot of future rate projections indicates there still is a greater likelihood of two moves before the end of 2016, doubts are increasing.

At the April meeting, just one member indicated that the year would end with only one hike. That number jumped to six at the June session.

Prior to the meeting, the fed funds futures market indicated just a 54 percent chance of one increase before the end of the year.

The summary of economic projections stated the funds rate is still projected at 0.9 percent for the end of 2016, which would represent two more quarter-point increases. But Fed officials lowered their expectations for future years, now looking for the funds rate to rise to 1.6 percent in 2017, as opposed to the 1.9 percent estimate in March, and to 2.4 percent in 2018, from a 3.0 percent estimate previously.

The dovish projections come less than two weeks after a Labor Department report showed a 38,000 increase in nonfarm payrolls for May, well below expectations in the 160,000 range.

In its post-meeting statement, the Fed noted that the unemployment rate has declined (to 4.7 percent) but "job gains have diminished."

While other indicators such as retail sales and housing have remained fairly solid, the weak payrolls report coupled with declining productivity and a general global slowdown have cast doubts on the future trajectory of economic growth. The possibility of a British exit from the European Union also has raised caution among economists and market participants.

Indeed, the FOMC cut its expectation for full-year gross domestic product growth, from 2.2 percent at the March meeting to 2.0 percent this week even though the statement said "economic activity appears to have picked up." The committee also lowered its 2017 projection a notch, from 2.1 percent to 2.0 percent.

Janet Yellen
Charles Krupa | AP

The committee did raise its inflation estimates, upping the headline number for 2016 from 1.2 percent to 1.4 percent and the core (excluding volatile food and energy prices) from 1.6 percent to 1.7 percent. However, even with the revision the numbers fall short of the Fed's 2 percent inflation goal as measured by the personal consumption expenditures index.

The FOMC statement noted that "household spending has strengthened" and that housing has improved generally, but it also cautioned that "business fixed investment has been soft." It also noted that drag from exports has diminished. The committee did not make a "balance of risks" assessment that for years had been a mainstay of Fed statements.

On inflation, the committee in April had observed that "market-based" inflation measures "remain low"; Wednesday's statement said they had "declined."

Fed Chair Janet Yellen managed to keep her dovish coalition together, even though several members in recent weeks have been saying that rate hikes are appropriate given current conditions. Esther George, who dissented in April, went with the majority this time, making the vote unanimous.