Fed Signals Gradual Rate-Hike Approach Intact Despite Soft Patch

(Bloomberg) -- U.S. central bankers stuck to their outlook for gradual monetary-policy tightening after they left interest rates unchanged and showed no alarm over recent economic weakness.

Federal Reserve officials were unusually explicit in their statement, released Wednesday following a two-day meeting in Washington, indicating that a disappointing first quarter wouldn’t knock the committee off its path to raise rates two more times this year after a hike in March.

“The committee views the slowing in growth during the first quarter as likely to be transitory,” the Federal Open Market Committee said. “Near-term risks to the economic outlook appear roughly balanced.”

The widely expected decision contained no concrete commitment to the timing of the next rate increase. Even so, investors increased bets on a move in June after absorbing the Fed’s sanguine assessment of the outlook and its encouraging observations on inflation, following data showing first-quarter economic growth of 0.7 percent and monthly price declines in March.

“Nothing in the statement today, which was voted unanimously by the FOMC, leads me to believe that the Fed is even close to changing its mind on rates,” Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients. “Base case is for a couple more rate hikes this year -- probably in June and September -- and for the beginning of balance sheet shrinkage in December.”

The Fed didn’t signal any change to its balance sheet policy. It is discussing how to begin shrinking its $4.5 trillion in holdings, and officials have said they hope to release a plan this year. They may start unwinding by the end of 2017, though that hinges on economic conditions.

The jobless rate has fallen to a level officials see as consistent with their maximum-employment mandate, and inflation is near the Fed’s 2 percent goal, even if price gains slowed in March. A core measure that strips out food and fuel was 1.6 percent on an annual basis, based on Commerce Department data, and headline inflation stood at 1.8 percent.

“Inflation measured on a 12-month basis recently has been running close to the committee’s 2 percent longer-run objective,” the Fed said. Household spending rose “only modestly” but the fundamentals underpinning consumption growth “remained solid.”

“The statement makes it very clear that the Fed does not take the reported slowdown in first-quarter growth seriously,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., wrote in an email to clients.

Fed-Speak Friday

The decision to leave the target federal funds rate unchanged in a range of 0.75 percent to 1 percent was unanimous and in line with forecasts. Fed Chair Janet Yellen did not have a press conference after this meeting. But she and at least five other Fed officials are scheduled to speak on Friday, giving policy makers a chance to explain their decision more fully.

Employers continued to hire at the start of 2017, averaging 178,000 net new jobs a month in the first quarter, and signs of labor-market tightness suggest wage growth will pick up further. The unemployment rate was 4.5 percent in March, near or below most estimates for its longer-run sustainable level. April’s figures are due Friday from the Labor Department.

The Fed’s next meeting will take place June 13-14 in Washington. That decision will come alongside officials’ updated quarterly economic projections and will be followed by a press conference with Yellen.

Investors increased the likelihood of a move next month to around 65 percent, according to pricing in federal funds futures contracts, compared to 60 percent before the FOMC decision was announced.

“This glass-half-full statement leaves the door wide open to a June hike, provided, of course, that the recent data letdowns are indeed transitory,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note to clients. “We expect this will be the case.”

--With assistance from Vince Golle Steve Matthews Craig Torres and Matthew Boesler

To contact the reporters on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net, Christopher Condon in Washington at ccondon4@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull, Scott Lanman