Fed Reveals Interest Rate Plan, Says Global Events ‘Pose Risks’
The Federal Reserve announced Wednesday it will hold interest rates at current levels and will slow plans for future increases, citing global economic uncertainty.
The Federal Open Market Committee (FOMC) members said they still believe economic growth will recover and inflation will pick back up in the long term to their 2 percent target, however, volatility in worldwide financial markets continues to pose a threat. The Federal Reserve plans to raise rates only twice this year, a downward revision from four planned increases in December.
“Global economic and financial developments continue to pose risks,” the FOMC statement said. “Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2% over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”
Inflation remains elusive, but some market analysts predict a gradual rebound. FOMC officials are confident continued improvement in the labor market will eventually spur greater growth and bring inflation back to their 2 percent target. Despite their positive long term outlook, Federal Reserve members appear tepid about economic growth this year, slashing their 2016 growth projection from 2.4 percent to 2.2 percent, reports CNBC.
Experts largely expected the Federal Reserve to leave interest rates unchanged, so the shift towards more conservative policy since the first rate hike in a decade in December is giving the central bank a credibility problem. Federal Reserve Chair Janet Yellen addressed this issue at a Wednesday press conference, stressing policy predictions from FOMC members are not written in stone and outside influences continue to shape their views on future inflation.
“There’s a lot of uncertainty around each participants assessment,” Yellen said at the press conference. “I want to warn that there may be some transitory factors that are influencing that [inflation].”
Historically cheap oil and uncertainty in China continue to ravage global markets. Fears over the stability of European economies is also influencing U.S. markets. Industry experts note it will be hard for the Federal Reserve to hit their targets while central banks in Europe and Japan engage in negative interest rate policy.
“They still see a pretty slow-growth low-inflation world ahead of us,” Kathy Jones, chief fixed income strategist at Charles Schwab told CNBC. “The big takeaway is the Fed is adjusting to the global economy, as the market already has. It’s really tough for our rates to go up much when they’re negative in the rest of the world.”
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