In its statement Wednesday, the Federal Reserve Open Market Committee (FOMC) didn't surprise anyone with its quarter-percentage-point trim...
In its statement Wednesday, the Federal Reserve Open Market Committee (FOMC) didn’t surprise anyone with its quarter-percentage-point trim to its federal funds target rate, which influences billions in consumer and business loans.
But the central bank’s language was neutral about whether the latest move marks the end of the rate-cutting campaign, which began in September.
“I don’t think they were explicit enough,” says JPMorgan Funds Management Chief Market Strategist David Kelly. “Frankly, I think that’s a mistake.”
When the Fed reduced the funds rate by three-quarters of a percentage point March 18, the bank said “The committee will act in a timely manner as needed to promote sustainable economic growth and price stability.” That signaled the Fed wasn’t ready to rest.
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This time, the central bank’s statement dropped the “timely manner” phrase but left the door open to more cuts if economic data weaken, according to Bear Stearns economist John Ryding.
Kelly thinks it would have been best if the Fed clearly suggested a pause to the cuts, because that would signal confidence in the economy’s recovery prospects.
“It’s a movement to neutrality, but it’s a very soft, wishy-washy way of getting to neutrality,” he says. “With the economy, it’s very important for investors to know where the bottom of interest rates are going to be.”
A bottom sends a signal to borrowers to take advantage of low rates, he notes.
Other Fed watchers wanted a pause; they’re worried low rates could fuel inflation. The Fed noted “uncertainty about the inflation outlook” in its statement while also saying it “expects inflation to moderate in coming quarters.”
On an annualized basis, inflation was up 3.1 percent in the first three months of the year.
Barclays U.S. economist Dean Maki expects the Fed to hold the rate at 2 percent until boosting it by a quarter-percentage point next March.
Merrill Lynch economist David Rosenberg has said the Fed might eventually cut rates to 1 percent.
Either way, the FOMC appears prepared to hold steady when it meets June 24-25, says Ryding.