The US Federal Reserve sat on interest rates for a second meeting, but firmed up the future path of US interest rates, but halved the number of increases that could occur in 2016.
The Fed’s ‘dot plot’ – the graph which shows where Fed members think interest rates will be in coming months and years – shows just two rate rises could occur this year, instead of the previous four.
“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” the post meeting statement said.
The US central bank kept the target range for the its key interest rate – the federal funds rate – unchanged at 0.25% to 0.5%, sitting pat for a second meeting in a row after the first increase in eight years in December.
But markets have now set September as when the next rate rise will happen – meaning that if there are two rate increases this year, they will occur very close together at the end of the year – effectively pushing rates up by half a per cent, which doesn’t seem possible.
The post meeting statement highlighted rising risks to America’s economic outlook from global financial and economic developments, but this was softened this concern with a generally upbeat outlook for the US economy this year.
"global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further,” The statement said in part
The Fed cut forecasts of increases in short-term rates in the coming years, with the median prediction for 2016 dropping to two quarter-point rises, down from four penciled in December.
But the Open Markets Committee’s broadly positive assessment of the US economy’s performance noted that inflation had picked up, the labour market was strengthening, and the economy had continued to expand moderately despite the hazards overseas.
"A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.
“Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months,” the Fed statement read.
Earlier US inflation rose in February, topping estimates for a second month in a row while solid reports on housing and industrial production confirmed the US economy seems to be coming out of the slowdown seen over the past four months or so..
The Consumer Price Index, excluding the volatile food and energy components, rose 0.3% last month after a similar rise in January. That lifted core CPI 2.3% in the 12 months to February, the largest increase since May 2012, after it after a 2.2% increase in January.
Other data showed the strongest rise in housing starts for five months (winter is over) and a rise in manufacturing production for another month, despite a fall in overall output caused by falling production of oil, gas and coal.
