Federal Reserve Holds Interest Rates Steady

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A divided Federal Reserve held its key interest rate steady Wednesday and once again lowered its projected path of rate increases amid a weaker economic outlook, but signaled that a hike later this year is likely.

“The economy has a bit more running room than might have been previously thought,” Fed Chair Janet Yellen said at a news conference. At the same time, she said, “We don’t want the economy to overheat,” adding that the case for a rate increase “has strengthened.”

She explained that despite solid job growth, the unemployment rate has been stuck at 4.9% because discouraged workers on the sidelines have been drawn into an improving labor market. She called that a positive development that policymakers want to encourage by keeping rates low longer.

The decision was widely expected and marked a significant concession from a Fed that in December had forecast four quarter-point rate increases in 2016. Instead, it’s almost certain the Fed will bump up rates just once, at most, this year, possibly at a mid-December meeting after the presidential election.

Yet a move later this year appears increasingly likely. Ten of the 17 Fed officials still expect one rate hike this year. And in the statement, the Fed said, “Near-term risks to the economic outlook appear roughly balanced,” its first such positive assessment this year. A similar appraisal last year was followed by a rate increase at the next meeting.

The decision to stand pat appeared to be a close call, with an unusual number of officials objecting. Three of the 10 voting policymakers dissented, saying they preferred to raise the Fed’s benchmark rate on Wednesday. They were Kansas City Fed president Esther George, Cleveland Fed president Loretta Mester and Boston Fed chief Eric Rosengren, who typically has been known as a “dove” who’s inclined to keep rates low to stimulate growth.

In the end, the Fed kept its benchmark rate at a historically low 0.4%, where it has stood since officials raised it in December for the first time in nearly a decade.

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Source: USA Today | Paul Davidson