Financial Times
Fed holds rates on inflation concerns
By Robin Harding in Washington
Published: June 22 2011
The US Federal Reserve gave a downbeat assessment of the world's largest economy on Wednesday as it pointed to slower than expected growth and higher inflation.
In the most significant change to its policy statement, it stripped out all reference to "subdued" measures of underlying inflation and said that the economy is growing "somewhat more slowly than the Committee had expected".
The toxic combination of disappointing growth but higher inflation combined to leave no hint that the central bank will consider further asset purchases to stimulate the economy.
"Certainly there was no hint of ease," said Jim O'Sullivan, chief economist at MF Global in New York. "One very notable change was dropping the language about inflation being too low."
The Fed cut the centre of its forecast range for 2011 growth from 3.2 to 2.8 per cent. It also trimmed its 2012 forecast from 3.85 to 3.5 per cent, suggesting that it expects fiscal tightening next year to bear down on growth.
The Fed also raised its forecast range for core inflation in 2011 to 1.5 to 1.8 per cent but made little change to its forecasts for later years.
Policy will stay frozen after the completion of the Fed's $600bn, so-called "QE2" round of asset purchases that it will complete on schedule at the end of June.
The Fed said that interest rates will remain on hold at 0 to 0.25 per cent for an "extended period" and that it will continue to reinvest in its securities portfolio. That will keep the Fed's balance sheet at around $2,800bn in size.
The private sector added only 83,000 jobs in May, compared with an average of 244,000 over the previous three months, indicating a slowdown in the labour market. Weak readings from the Empire State and Philadelphia Fed manufacturing measures suggest that the economy's "soft patch" has continued into June.
The Fed noted "weaker than anticipated" labour market indicators but said that the "slower pace of the recovery reflects in part factors that are likely to be temporary", such as supply chain disruptions caused by the tsunami in Japan.
The change in tone on inflation acknowledges the unexpected strength of core price rises, excluding volatile food and energy prices, up at an annualised rate of 2.5 per cent in the three months to May.
The Fed said that "inflation has moved up recently" but that it expects price rises to "subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate".
Inflation that is expected to fall only to levels in line with the Fed's target means that there is no scope to ease policy any further to try to bring down a stubbornly high unemployment rate.
The central bank made only minimal changes to its statement to accommodate the completion of the QE2 asset purchases that it began last November. It said that it will "regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate".
Although the Fed was always unlikely to make a substantive move in June, as it will want to judge the effects of QE2 ending, the changes to its statement suggest that policy may remain on hold for longer than previously expected.
The FOMC adopted the resolution with a unanimous vote of 10-0.
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