The Federal Reserve leaves interest rates as it is and officials lowered projections of how much they expect to raise short-term interest rates in the coming year. This shows how persistently slow the economic growth is and also the inflations force central banks to rethink the speed of interest rate hike.
“The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up,” the FOMC said in a statement after its gathering, where it left the target range for the benchmark federal funds rate unchanged at 0.25% to 0.5%.
The Fed expressed confidence that jobs will rebound, announcing “labor market indicators will strengthen” and “net exports appears to have lessened.” Also, housing has improved, while business fixed investment has been soft.
The central bank reiterated that interest rates are likely to rise at a gradual pace, without referring in the statement to the next meeting in July or any other specific timing for another increase.
The Fed slightly reduced its estimate for how much economic output will expand this year, shifting its March projection of 2.2% output growth to 2%. It also nudged down its 2017 growth projection by one tenth of one percent to 2%. At the same time, it nudged up its inflation projection for the year to 1.4% from 1.2%, but held most of its other projections steady. The combination of relatively stable economic projections and a lower interest rate outlook suggest officials are slowly coming to the conclusion that the economy simply can’t bear very high interest rates, even to achieve mediocre growth and low inflation.
Janet Yellen has said headwinds are holding back the economy. It might be the case that those headwinds are persisting longer than she expected, or new ones are emerging, such as China’s economic slowdown. Officials also have been weighing whether the economy’s equilibrium interest rate, a rate at which the economy is in balance with stable inflation and low unemployment, has fallen because of long-running trends holding back growth and beyond the Fed’s control, such as the retirement of workers and low productivity growth.
One risk factor for global financial markets will come to a head in eight days when voters in Britain decide in a referendum whether to remain in the European Union. Recent opinion polls showing gains for the “Leave” campaign have weakened the pound and driven yields on German 10-year bonds below zero for the first time.