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Investors to seek clues from Fed on rate increase

By Martin Crutsinger

Associated Press

Published: Wednesday, June 18 2014 6:55 a.m. MDT

In this May 7, 2014 file photo, Federal Reserve Chair Janet Yellen testifies about the economy before the Joint Economic Committee of Congress on Capitol Hill in Washington. The Federal Reserve issues a policy statement when its two-day meting ends Wednesday afternoon, June 18, 2014.

Charles Dharapak, File, Associated Press

Enlarge photo»

WASHINGTON — A stay-the-course message is expected from the Federal Reserve on Wednesday after it ends a two-day policy meeting.

The Fed will likely approve a fifth cut in its monthly bond purchases because the job market has steadily strengthened. But no clear signal is expected on when the Fed will start raising short-term interest rates from record lows.

The meeting will end with a statement outlining the Fed's plans. The central bank will also update its economic forecasts, and Janet Yellen will hold her second news conference since becoming Fed chair in February.

The Fed got some further cause for discussion just before it started this week's meeting with a report Tuesday of a surprising jump in consumer inflation.

Yet most economists aren't altering their view that the Fed's first rate increase is at least a year away. Analysts cautioned that that time frame could change if inflation were to accelerate. The consumer price index rose 0.4 percent in May, the government said, and has risen 2.1 percent over the past 12 months — roughly at the level of the Fed's target rate for inflation.

It's why the Fed might actually welcome the news of slightly higher inflation. It will help ease long-standing concerns that inflation might be too low. For the past two years, inflation by one key measure has remained under the Fed's 2 percent target.

Investors will be seeking any new clues the central bank might send about when it will finally raise its benchmark short-term rate. That rate has been at a record low near zero since 2008. They will also be looking for hints about how and when the Fed will start unloading its vast investment holdings.

The answers will affect loan rates for individuals and businesses — and perhaps the direction of the economy. Yet few expect to hear anything definitive. The Fed remains in a tentative wait-and-see stance.

Though the central bank has signaled optimism, officials are unsure how much the economy will strengthen the rest of the year. In its updated forecasts, the Fed may downgrade its estimate of growth for 2014 after the government said last month that the economy shrank in the first quarter, depressed by a harsh winter.

Yellen has suggested that the U.S. unemployment rate, now 6.3 percent, overstates the health of the job market and economy. She's also expressed concern that a high percentage of the unemployed — 35 percent — have been out of work for six months or more and that pay is scarcely rising for people who do have jobs.

The minutes of the Fed's last meeting in late April indicated that the central bank has begun discussing the tools it could use to finally pull back the extraordinary stimulus it's provided the U.S. economy since 2008.

Analysts expect at least one announcement when the two-day policy meeting ends Wednesday: That the Fed will make a fifth $10 billion cut in the pace of its monthly bond purchases to $35 billion, a sign of a steadily, if slowly, improving economy. The Fed has been buying Treasury and mortgage bonds to try to keep long-term loan rates low to stimulate the economy.

The Fed will likely end its bond purchases this fall, with its investment portfolio nearing $4.5 trillion. But officials have said that even when they stop buying bonds, they don't plan to start selling any. They plan to keep the Fed's holdings steady by re-investing maturing bonds. In doing so, the Fed will still exert downward pressure on long-term rates.

The Fed has said it will keep its key short-term rate at a record low near zero for a "considerable time" after its bond purchases end. At her news conference, Yellen will likely avoid being pinned down on how long a "considerable time" might be. Last month, she said the Fed expects to start raising rates once it sees enough progress in restoring full employment and inflation has risen to its 2 percent target rate.

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