Fed Stays ‘Patient’ But Voices New Low Inflation Concerns

WASHINGTON — The Federal Reserve reiterated Wednesday that it will be “patient” in raising rates from record lows but noted that inflation remains well below its target rate.

In a statement after its latest policy meeting, the Fed made clear that no rate increase is imminent. Chair Janet Yellen said after last month’s meeting that by saying it would be “patient,” the Fed was signaling there would be no rate increase for at least two meetings.

The Fed’s statement Wednesday said the factors holding inflation below its 2 percent target rate have intensified since its last meeting in December. Inflation has stayed ultra-low partly because of a plunge in energy prices and a steadily strengthening dollar.

The central bank said it thinks inflation will decline further before starting to rise gradually.

The Fed statement’s emphasis on low inflation could affect when it decides to raise its key short-term rate from near zero. Many economists have forecast a Fed rate hike in June but some have pushed back that timetable.

The U.S. economy’s steady growth and a strengthening job market would normally argue for a move to begin raising rates to prevent high inflation. The Fed has kept its benchmark rate near zero since December 2008 to encourage borrowing, spending and investment and support the economy’s recovery from the Great Recession. The Fed’s key rate affects rates on many consumer and business loans.

But concerns about global economic weakness and low inflation have raised doubts about when the Fed’s first rate increase will occur. A growing number of economists say the date could slip to September or even later. Economists at Morgan Stanley (MS) this week pushed back their forecast for the first rake hike to March 2016 because of the factors holding inflation down.

If the Fed wants to signal that a rate hike is coming in June, it would need to alter the “patient” wording at its next meeting in mid-March

A complicating factor is the European Central Bank’s new plan to flood its sputtering economy with more than 1 trillion euros. That money should keep the eurozone’s interest rates ultra-low and could lead some investors to buy higher-yielding U.S. Treasurys. That would further strengthen the dollar and could push U.S. inflation further below the Fed’s 2 percent target.

Growth in China, the world’s second largest economy, is slowing, too.

By contrast, the U.S. economy added nearly 3 million jobs added last year, enough to cut the unemployment rate to 5.6 percent. That is just above the Fed’s goal of 5.2 percent to 5.5 percent unemployment.

But Yellen and other Fed officials have pointed to other factors — such as weak pay growth and a still-high number of part-time workers who can’t find full-time jobs — as evidence that more must be done to achieve a healthy job market.

U.S. prices rose just 1.2 percent in the 12 months that ended in November, according to the Fed’s preferred gauge of inflation. When inflation is too low, consumer spending — and economic growth — can slow as people delay purchases on the assumption that the same or lower prices will be available later.

The biggest fear is deflation — a broad decline in prices and income that can further restrain spending and even tip an economy into recession.

[source : dailyfinance.com]