Wary Fed Rethinks Pace of Rate Hikes The Federal Reserve held short-term interest rates steady and officials lowered projections of how much they’ll raise them in the coming years, signs that persistently slow economic growth and low inflation are forcing the central bank to rethink how fast it can lift borrowing costs.
(…) “I can’t specify a timetable,” about when rates will next be raised, she said at a press conference following the Fed’s two-day policy meeting. “We are quite uncertain about where rates are heading in the longer term.”
Federal Reserve Chairwoman Janet Yellen on Wednesday cast doubt on a significant interest-rate increase in the near future, saying turmoil in global markets and a sluggish U.S. economy will likely keep rates low. Photo: AP
The uncertainty was striking in part because the Fed’s forecasts for the economy didn’t change much from the quarterly projections released in March. Officials still expect modest economic growth near 2% annually over the next three years, a rise in consumer-price inflation to 2%, and an unemployment rate below 5%. (…)
Ms. Yellen previously said she believed temporary headwinds were holding back the economy. She conceded Wednesday that such drags, such as slow productivity growth, might persist. Moreover, new ones, such as China’s slowdown, are emerging.
Notably, Ms. Yellen won a unanimous vote on Wednesday’s policy statement. Kansas City Fed President Esther George, who dissented in March and April in favor of a rate increase, instead voted with the majority. (…)
The new projections released Wednesday showed officials expect the fed-funds rate to rise to 0.875% by the end of 2016, according to the median projection of 17 officials. That implies they see two quarter-point rate increases this year, as they did in March.
However, a greater number of officials now see just one increase, rather than two moves. In March, just one official saw one rate increase this year and seven saw three or more. Now six officials see one increase this year and two see three or more. (…)
The new projections also show central-bank officials see the fed-funds rate at 1.625% by the end of 2017 and 2.375% at the end of 2018, both lower than their March estimates.
In the longer run, Fed officials now expect the benchmark rate to reach 3%, lower than the 3.25% they saw in March. (…)
Mrs Yellen said at the presser:
- “Recent economic indicators have been mixed, suggesting our cautious approach to adjusting monetary policy remains appropriate,”
- “We need to assure ourselves that the underlying momentum in the economy has not diminished”
From the Philly Fed yesterday (Last update: June 15, 2016, at 10:45 a.m. ET):
This is truly a quite uncertain Fed!
U.S. Industrial Production Fell 0.4% in May U.S. industrial output declined 0.4% in May amid a 4.2% drop in auto production, a reminder of the factory sector’s lackluster performance in recent months.
(…) Manufacturing output slid 0.4% in May, led by a 4.2% drop in production of motor vehicles and parts. Overall factory activity is down 0.1% from a year earlier. (…)
Capacity use, a measure of how much industries are making as a share of potential output, fell 0.4 percentage point to 74.9%. The rate is 5.1 percentage points below the historical average, suggesting there is still ample slack across the economy.
Overall industrial production was down 1.4% in the 12 months through May. Utility output is down 0.8% and mining output has plunged 11.5%.
IP declined in 3 of the last 4 months, 7 of the last 10. Chart from Haver Analytics.
The economic outlook among top leaders is improving and firmer investment plans are the primary driver, according to Business Roundtable’s second-quarter CEO Economic Outlook Survey, released Wednesday. The group’s members are chief executives at the country’s largest firms.
The survey found that 37% of CEOs polled plan to increase capital spending in the next six months versus 18% who plan to cut back. The first quarter survey showed 34% planned increases and 23% said they’d reduce such spending.
Companies’ hiring plans and sales projections also improved modestly, but the investment plans were the primary driver for the CEO outlook index rising to 73.5 in the second quarter from 69.4 in the first. Figures above 50 indicate expansion. The latest reading remains below the average of 79.8 since 2004.
Despite the recent outlook improvement, CEOs downgraded their view of 2016 economic growth to 2.1% from 2.2%. (…)
(…) The data also suggest that the economic malaise at worldwide intermediate goods producers is likely to persist and that the road to recovery will be bumpy. Whereas new business inflows rose, the growth rate remained weak by historical standards, which in turn stymied hiring. Even with a reduced workforce size, firms were able to lower their outstanding business suggesting further layoffs in coming months. Buying levels also decreased in May, leading to the fastest contraction in pre-production stocks for five months.
Of concern, feeble demand for intermediate goods output points to hesitancy among investment and consumer goods companies with regards to intentions to build inventories and raise capital expenditure on plant & machinery.
We don’t get to see a chart on global retail sales often. Look at the downshifts in global sales growth from about 5.5% between 2010 and 2012 to 4.5% in 2013-14 and to 3% since 2015. So much for the expected boost from lower oil prices.