Federal Reserve hints at economic worries as it keeps rate unchanged

[WASHINGTON] The Federal Reserve said US growth slowed late last year and hinted at more worries over global economic weakness as it kept its benchmark interest rate unchanged Wednesday.

In the first monetary policy meeting after its historic rate increase in December, the US central bank showed slightly less confidence than a month ago about the trajectory of inflation and growth even as it noted strengthening in the jobs and housing sectors.

But the policymakers of the Federal Open Market Committee said they still expected that inflation, weakened in the short term by the oil price crash, would push toward the 2.0 per cent goal in the medium term.

And they left the door open for a second rate increase in March, even as markets increasingly discount the likelihood.

Coming a week after the European Central Bank gave a strong signal that it was ready to ease policy further in the coming months to combat deflation, the FOMC made no suggestion of policy actions after a two-day meeting.

It left its December increase in the benchmark federal funds rate stand at 0.25-0.50 per cent, having made the quarter-point hike after keeping the rate locked near zero for seven years.

That decision had been taken after steady gains in the jobs market pulled the unemployment rate down to 5.0 per cent, and as the FOMC said it was "reasonably confident" that inflation, held down by falling commodity prices and the strong dollar, would begin edging up toward its 2.0 per cent goal.

But in Wednesday's statement, the Fed dropped that expression of "reasonably confident" and also alluded to the turmoil in global markets that, in part, comes from its plans to tighten US monetary policy.

"Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year," the panel said.

"The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook." The modest downgrade of expectations made "no clear new signal" about Fed policy, said Jim O'Sullivan of High Frequency Economics.

"That does not mean they will not make changes, of course, but that will depend on the data and the markets." With markets having shown concern that the Fed was too confident in US growth and the inflation outlook in December, the adjustments were only somewhat comforting.

"Today's Fed statement was dovish regarding Fed policy, but the Fed's ongoing dovishness stems from concerns about downside risks to growth, rather than a more benign view of inflation," said Jason Schenker, president of Prestige Economics.

Steve Ricchiuto of Mizuho Securities said the FOMC statement was "not as dovish as hoped for." The Fed is still "not ready to support growth even though they themselves see that the economy has slowed. The result is an equity market that has little to be optimistic over," he said.

US stocks headed lower, with the S&P 500 down 0.6 per cent in afternoon trade, after having been in positive territory before the announcement.

The dollar slipped against the euro, to US$1.901, but was higher on the yen, at 118.76 yen, and the pound, at US$1.4254.

AFP