12/12/2019 1:13:00 PM Federal Reserve leaves low rates alone
WASHINGTON (AP) — Chairman Jerome Powell made clear Wednesday that the Federal Reserve is prepared to keep its benchmark interest rate very low through at least next year — and possibly longer.
Fueling that expectation is the growing belief of Fed officials that inflation will remain tame even as the economy keeps growing modestly and the job market remains solid. The lowest unemployment rate in a half-century — 3.5% — won’t necessarily fan high inflation as it might have in the past, Powell suggested at a news conference.
On Wednesday, the Fed left its key short-term rate in a low range of 1.5% to 1.75% after having reduced it three times this year. Powell had previously characterized those rate cuts as “insurance” that would offset the drags from the U.S.-China trade war and global slowdown. But on Wednesday, he boldly suggested that the Fed wouldn’t likely reverse those cuts for the foreseeable future.
“Inflation is barely moving up, notwithstanding that unemployment is at 50 year lows and expected to remain there,” Powell said at his news conference. “We have learned that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation.”
In a further sign of its confidence, the Fed’s latest policy statement dropped a phrase it had previously used that referred to “uncertainties” surrounding the economic outlook. This change suggested that the Fed is now less worried about economic risks from the trade fights or global slowdown.
With the Fed’s key rate likely to stay where it is, consumers interested in buying a home or car should continue to enjoy low borrowing costs. Businesses will likely also enjoy lower interest rates. Savers, though, will struggle to earn a return above the inflation rate.
Powell signaled that persistently low inflation is allowing the Fed to pursue low interest rate, or “accommodative,” policies to sustain the 11-year economic expansion and try to create the conditions for more people to find jobs.
“Even though we are at 3 1/2% unemployment, there is actually more slack out there in a sense,” Powell said. “And the risks of using accommodative monetary policy, our tool, to explore that, are relatively low.”
The chairman expressed optimism about the economy and satisfaction that the Fed’s rate cuts this year may have helped prolong growth.
“Both the economy and monetary policy are in a good place,” he said.
Many analysts note, though, that the economy faces threats from the trade conflicts, a stumbling manufacturing sector and cutbacks in business investment. Some say the Fed may feel compelled to cut rates at least once next year.
Still, in updated forecasts the Fed issued Wednesday, no officials penciled in a rate cut in 2020. Instead, four Fed officials said they expected a rate increase next year. The remaining 13 officials projected no change to rates.