Federal Reserve Puts Rate Hikes on Hold

The Federal Reserve has fully reversed course, indicating that interest rate increases are likely to come later rather than sooner, as weak economic growth plagues the United States.  Recently released Federal Open Market Committee (FOMC) minutes point to the central bank’s hesitance to raise borrowing costs for Americans due to protracted weakness throughout the broad economy.

The Federal Reserve has fully reversed course, indicating that interest rate increases are likely to come later rather than sooner, as weak economic growth plagues the United States.  Recently released Federal Open Market Committee (FOMC) minutes point to the central bank’s hesitance to raise borrowing costs for Americans due to protracted weakness throughout the broad economy.

Because of this weak growth, the Federal Reserve has made it clear that an interest rate hike in April was inappropriate, while also hinting that a rate hike remains unlikely until there is drastic improvement in the data.

“The headwinds restraining growth and holding down the neutral rate of interest were likely to subside only slowly,” said the FOMC in a public statement. “In light of this expectation and their assessment of the risks to the economic outlook, several expressed the view that a cautious approach to raising rates would be prudent.”

Cautious Optimism

Despite the admitted sluggishness in the economy, the Fed stood by its view that there are signs of some economic improvement even as business fixed investment and net exports remain “soft,” as the Fed put it. This led to a sense of hopefulness that the data would continue to improve later in the year, giving the central bank room to raise their short-term interest rate target.

That doesn’t mean inflation has come near the bank’s two percent target, and the Fed acknowledged that weak inflation continued to be a theme in the U.S. economy, although the bank continued to blame oil. “Consumer price inflation was still running below the Committee’s longer-run objective of 2 percent, restrained in part by decreases in both consumer energy prices and the prices of non-energy imports,” the FOMC said.

Strong Labor Conditions

In the past, the Fed has been harshly criticized for focusing more on strength in the labor market when making monetary decisions, indicating that the bank’s concern is more in making wages low and, thus, labor cheap for corporations, instead of focusing on helping laborers have more bargaining power in a market some consider somewhat monopolistic.

In that vein, the FOMC spend a significant amount of time discussing labor conditions, emphasizing whatever strength exists in the data. “Total nonfarm payroll employment increased in January and February at a solid average monthly pace,” the FOMC noted, adding that part-time work is down, private-sector job openings, quits, and hires saw a modest gain, and initial unemployment claims are down.

Turning to incomes, the FOMC also noted improvements for Americans, but did not discuss the decline in real and nominal wages since 2008. “Labor compensation continued to rise at a modest pace. Compensation per hour in the nonfarm business sector increased 2.5% over the 4 quarters of 2015, and the employment cost index rose nearly 2% over the 12 months ending in December,” the FOMC noted. “Average hourly earnings for all employees increased 2.25% over the 12 months ending in February.”

Although incomes have risen slightly in recent months, incomes are still down from their pre-crisis highs, unlike home prices and corporate profits, which have largely recovered since the financial crisis.