Keeping rates intact, US Fed maintaining an eye overseas

WASHINGTON / AP

When the Federal Reserve chose not to raise its key interest rate, it nevertheless made clear that its next move will be another increase. That stance puts it at odds with other major central banks, which are doing the reverse — seeking to ease credit to spur lending.
That policy divergence could pose risks for the global economy and may be a reason the Fed has at least slowed its march toward higher rates. Some economists think it may not be until the second half of the year before the Fed raises rates again, in part to avoid departing too far from the policies of the Bank of Japan and the European Central Bank.
The divergence reflects the contrast between a relatively solid US economy — viewed as able to withstand higher borrowing rates — and weaker economies in Asia and Europe.
On Wednesday, the Fed said it was keeping its benchmark rate unchanged after having raised it from record lows in December. That was the Fed’s first hike in nearly a decade, and at the time it signaled that it expected to raise rates four more times in 2016. But there was no hike in January or March. And in March, the Fed revised its expectations to possibly just two rate hikes this year. In its statement, the Fed noted a slowdown in the US economy, with subpar readings on consumer spending, business investment and exports. It offered no likely timetable for the next rate hike.
This Fed’s decision followed a meeting last week by the ECB in which its president, Mario Draghi, made clear he was ready to launch more stimulus efforts if needed to energize the eurozone economy. His pledge came after the ECB had already expanded its stimulus programs in March. Analysts say they think actions by the central banks in Japan and Europe have been a factor in the Fed’s decision to slow the pace of rate hikes in the US.
“The message the Fed is getting from Europe and Japan is that they are keeping rates extremely low and in some cases negative,” said Brian Bethune, an economics professor at Tufts University. “The Fed has to pay attention to that because they don’t want to push the dollar’s value up more.”
Indeed, since the Fed has hit the pause button on its own rate hike plans, the dollar has retreated from the highs it reached at the start of the year. The stronger dollar has been a drag on the US economy by hurting exports and widening the trade deficit. A strong dollar makes US goods costlier overseas.
Bethune foresees just one more rate hike this year, in September. By fall, Bethune says the US economy should be growing more quickly after nearly stalling at the beginning of this year.
Fed has noted that the US is enjoying solid job gains but also that ‘economic activity appears to have slowed’. It said such key sectors as consumer spending, business investment and exports have weakened. At the same time, it expressed less alarm about global economic conditions than it had after its meeting in March.