Although inflation remains muted, the labor market is going strong and global risks have abated, the Fed noted.
The Federal Reserve left its benchmark federal funds rate unchanged Wednesday, noting that global risks have abated, and inflation pressures have eased.
The Fed is also maintaining its patient stance towards any further rate policy action. With average rates on credit cards (which move with the fed funds rate) now at a high of 17.71 percent, this holding off on rate hikes should also cheer credit card holders.
The Fed noted that growth in consumer spending had slowed down in the first quarter, along with business fixed investment.
While economic activity has risen at a “solid rate,” and job gains have been going strong too, inflation is still below the Fed’s 2 percent target. The target fed funds rate remains therefore in the 2.25 percent to 2.5 percent range.
In a related press conference, Fed Chair Jerome Powell noted that households are in good shape from a debt standpoint. He sees global risks as having abated, with data from China improving, and the risk of a disorderly Brexit having eased for now, together with positivity on the trade talks front.
In light of all this, Powell sees the Fed’s current policy stance as appropriate, and doesn’t see a strong case for moving in either direction, repeating that the Fed would remain patient.
See related: Guide to rising credit card interest rates
Dip in inflation is temporary
Diane Swonk, Grant Thornton chief economist, said in a May 1 article, “Fed Chairman Jay Powell tried to temper expectations for a preemptive cut in rates tied to inflation. He underscored that the Fed still believes that the low pace of inflation is a transitory phenomenon.”
Commenting on the Fed’s lack of action, Pantheon Macroeconomics Ian Shepherdson said in an e-mail, “In short, no surprises in the statement. The Fed had to acknowledge both the unexpected strength of growth in Q1 and the equally unexpected drop in core PCE inflation, neither of which likely will be repeated in Q2. Markets want the Fed to ease, but that makes sense only if you think core inflation is going to keep falling, which seems unlikely in the face of the gradual acceleration in wages.”
Even though the current expansion has been ongoing for about 10 years now, Powell sees the outlook for growth for the rest of the year as positive. Consumer spending has been stronger, supported by consumer confidence and wage growth. Business investment should also enable expansion, and any resolution of the uncertainty around trade deals would also be beneficial for business sentiment.
And although the ISM manufacturing index, providing a reading on the state of the manufacturing sector, came in lower today, it is still in growth mode. Powell expects a positive contribution to economic output from the manufacturing sector, too.
He doesn’t see any evidence of overheating and sees as a plus a rise in the labor force participation rate – which is a measure of the number of working-age people who are employed or actively looking for work – in recent years. This suggests the economy may be less tight than it looks, which is part of the explanation for low inflation.
About any potential for political pressure from President Trump to influence the Fed’s rate-setting, Powell noted that the central bank is a “nonpolitical institution” and goes by the data.
Swonk says, “Expect the Fed to move on shifts in the economy, not changes in the political environment, even if a more political appointee were to make it onto the Board of Governors. One vote does not change the course of the Federal Reserve.”