Seeing no signs of building inflation and making no mention Europe’s widening financial woes, the Federal Reserve on Wednesday kept its benchmark interest rate at near zero and gave no hint of an imminent change in policy.
Mainstream economic forecasters did not expect a policy shift from the Fed, which has been widely expected in June to make its first move up on interest rates since December 2008. But there has been growing speculation that efforts by the European Central Bank to stimulate the economy of its region may complicate the Fed’s so-called liftoff date.
If so, the rate-setting Federal Open Market Committee didn’t show its cards. It repeated in a statement Wednesday that it will make its decision based on available data and that it could move earlier or later as it sees fit.
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Fed said.
It mean financial markets will have to keep waiting on the Fed for signs of future action.
“The statement allows everyone to hold to their positions on the timing of Lift-off!” said Steven Ricchiuto, chief economist for Mizuho Securities USA.
Although June has long been thought of as a potential start date for rate hikes, Europe factors into the equation. The aggressive stimulus plan announced in Europe this month has driven up the value of the U.S. dollar against the euro and other currencies.
Thus here’s the rub for the Fed. Raising interest rates tends to strengthen the dollar further and push down inflation. The latter is already well below the Fed’s target of 2 percent, and a strong dollar threatens not only U.S. exporters but also many domestic industries. For instance, foreign steel or lumber becomes cheaper to import relative to steel made or lumber processed in United States.
Adding to the intrigue, the Commerce Department on Friday reports economic growth data for the final three months of 2014. After sharp upward revisions to initial estimates from the prior quarter, fourth-quarter growth is expected to be stronger than originally forecast.
Normally, that argues for a rate hike to make sure the economy doesn’t begin to overheat, but given extremely tame inflation the Fed appears to have breathing room.
One of those hoping for the Fed to hold off on rate hikes is Caterpillar CEO Doug Olberhelman.
“I encourage the Fed not to raise interest rates sooner than they have to because the underlying (economic) foundation is not that strong yet,” Oberhelman told CNBC television on Tuesday.
In its statement, the Fed did point to signs of continuing economic improvement.
“On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish,” the Fed statement said. “Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow.”