Fed Leaves Rates Unchanged, Ducks Criticism About Confusing Guidance

Three of the 10 voting members of the Fed's monetary policy committee wanted to raise the target range for short-term interest rates by a quarter of a point.

The Federal Reserve, as expected, didn't raise interest rates today -- but the central bank sent mixed messages about whether the economy is strengthening that sparked fresh criticism of a central bank increasingly seen as indecisive.

The action leaves the target range for the closely-watched Federal Funds Rate at 0.25% to 0.5%. But the language in the post-meeting statement issued by the Fed's Open Market Committee and the economic projections of the committee's members pointed in different directions.

The language suggested the economy is gaining steam, while the projections pointed to weaker medium-term growth and a slower upward path to rates than the Fed has seen as likely until now, while continuing to predict that the central bank will boost rates at least once this year, probably in December.

Committee members said that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. In a notably more upbeat summation of the economy than the committee made in its July statement, the Fed said "the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid."

"We're generally pleased with how the U.S. economy is doing," Fed Chair Janet Yellen said at a news conference. But, she added, the recent jump in workforce participation and other measures indicate the economy still has enough slack that inflation isn't a major risk. "The economy has a little bit more room to run than we thought, which is good.''

Indeed, three of the 10 voting members of the committee wanted to raise the target range for short-term interest rates by a quarter of a point.

"I think they are laying the groundwork for a December rate hike, but after two disappointing prints on gross domestic product growth they want to wait and see if growth has actually recovered in the third quarter," said Brian Coulton, chief economist at Fitch Ratings. "The labor-market data seems less of a reason to wait now, but the recent weakness in non-oil business investment is likely giving them grounds to hold off a bit longer."

Economic projections released along with the statement show that the members of the committee reduced their median estimate of this year's growth in the economy to 1.8% from a projection of 2% in June, and trimmed their projections for how quickly rates will be likely to rise over the next two or more years.

The inaction, regardless of the members' seemingly growing support for a rate hike, didn't sit well with some economists.

 "If you want to consider this a 'hawkish hold,' knock yourself out, but saying the case for a rate hike has strengthened but opting to wait simply means there are now three more months for something to go wrong and fend off a December rate hike," Regions Financial Chief Economist Richard Moody said in an e-mail. "This statement doesn't do much for their credibility."

Brian Sozzi, a columnist for TheStreet's subscription-based premium site Real Money, added in his analysis of the Fed's move that the central bank is "talking out of both sides of its mouth. The market loves it, so why not ride out the bullishness for now?"

See full coverage of the Federal Reserve's monetary policy here.

By Tim Mullaney

Source : https://www.thestreet.com/story/13747749/1/fed-walks-tightrope-on-guidance-after-leaving-rates-unchanged.html