Federal Reserve keeps interest rates flat, points to low inflation

The U.S. central bank is keeping a key interest rate steady, despite urges from President Donald Trump to lower it in order to boost the economy. Even though growth in household spending and business investment has slowed, "job gains have been solid, on average, in recent months, and the unemployment rate has remained low," the Federal Reserve's rate-setting body said in a statement Wednesday.

The target interest rate remains between 2.25 and 2.5 percent. The historically low Fed rates have kept the cost of borrowing low for consumers and businesses, aiding a steady economic expansion that approached 3 percent last year. This year, the Fed expects U.S. GDP to grow by about 2.2 percent.

The Fed raised rates four times last year but more recently has indicated that it foresees no hikes at all this year. At the same time, prices have been growing more slowly than the Fed would like over the long term. The central bank, whose job it to keep prices steady while encouraging full employment, aims for overall price increases of about 2 percent yearly. Lately, however, prices have grown at just 1.5 percent, and many analysts believe the Fed won't raise rates again until inflation exceeds the 2 percent mark.

Speaking to reporters Wednesday afternoon, Fed chairman Jerome Powell said the unusually low inflation was, in fact, transitory. He cited the low costs of clothing, airline tickets and portfolio-management services.

"We're going to be watching inflation carefully to see that these things are transient," he said.

Disavowing politics

Mr. Trump, who made the Fed's rate hikes a target of his ire last year, is now trying to persuade it to cut rates. On Tuesday, the first day of the FOMC's two-day meeting, Mr. Trump tweeted that the U.S. economy has "the potential to go up like a rocket" if the Fed would only slash rates and resume what's called quantitative easing — the emergency bond-buying programs the central bank launched after the Great Recession to stimulate spending and growth.

Despite Mr. Trump's tweets, however, analysts don't see the central bank lowering rates. "Markets want the Fed to ease, but that makes sense only if you think core inflation is going to keep falling, which seems unlikely in the face of the gradual acceleration in wages," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note.

Powell on Wednesday reiterated his position that the Fed's policymakers don't consider politics in their interest-rate decisions: "We are a non-political institution. We don't think about short term political considerations. We don't discuss them," he said.

Back in good spirits

The generally brighter outlook for the economy and the stock market marks a reversal from the final months of 2018, when concerns about a possible global recession and fear of further Fed rate increases had darkened the economic picture and sent stock markets tumbling. 

Stock prices tumbled late last year, especially after the Fed in December not only raised rates for the fourth time in 2018 but suggested that it was likely to keep tightening credit this year.

Yet starting in January, the Fed turned around, suggesting that it was finished raising rates and might even act this year to support rather than restrain the economy. Its watchword became "patient." And investors have responded by delivering a major stock market rally that has erased last year's losses.

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• Jerome Powell
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