The Federal Reserve left its influential interest rate unchanged at the conclusion of its two-day meeting in Washington last Wednesday, citing a recent slowdown in growth that it said was likely ‘transitory.’

The release acknowledged the sluggish first quarter, saying that the labour market continued to strengthen ‘even as growth in economic activity slowed.’ It added that the Fed expects the economy to evolve in a manner that will warrant gradual increases in its interest rate, the same language it has used in previous months.

Investors had widely been expecting the central bank to remain on hold this week, given that economic data has been somewhat weaker in the past month and that the Fed still has plenty of time to realise its plan of raising interest rates twice more this year. Markets are more confident of seeing a rate hike in June, when the Fed is scheduled to hold a press conference where it can provide more details on its decision.

In March, the Fed raised its interest rate by 25 basis points to a range of 0.75pc to 1.0pc, only the third such increase since it slashed interest rates to buoy the economy in the depths of the financial crisis.

Consumer and business confidence remain high, but analysts say there is a risk these measures could begin to flag if more economic-friendly policies don’t emerge soon

Government data released last week showed that the US gross domestic product, a broad measure of economic activity, grew at just 0.7pc on an annualised basis in the first quarter, the slowest pace in three years. Federal figures on the number of new jobs created in March also fell far short of the high levels seen in January and February, while inflation measures remain below the Fed’s targeted rates.

In its release, the Fed mentioned that consumer prices, excluding energy and food, declined in March, as inflation continued to run somewhat below the central bank’s two per cent target. It added that household spending has risen only modestly since its last meeting in March, but that the fundamentals underpinning consumption growth still appear solid.

Most economists believe these figures are just a temporary blip, due to seasonal measurement issues and the vagaries of spring weather. If the string of disappointing figures continues, however, that could persuade the Federal Reserve to hold off on raising rates while the economy strengthens further. The central bank has emphasised that the pace of rate hikes will hinge on the state of the economy.

Yet other analysts caution that raising rates too slowly also holds a risk. If the Fed does not move to head off inflation by raising rates gradually now, that could put it in a situation where it needs to hike rates more quickly later, a hard transition for businesses and consumers.

“In our view, the US economy has now reached full employment and is likely to overshoot meaningfully, a path that has often proven risky. From this perspective, the case for further tightening is strong,” Goldman Sachs analysts wrote in a note May 1.

US stock markets opened slightly lower last Wednesday morning, after approaching record highs in recent weeks.

Consumer and business confidence remain high, but analysts say there is a risk these measures could begin to flag if more economic-friendly policies don’t emerge soon.

“We’re seeing is a greater level of scepticism,” said Greg McBride, chief financial analyst at Bankrate.com. “I think consumers, businesses and investors have shifted into show-me-the-money mode. They’ll believe it when they see it with regard to faster-economic growth, tax cuts, infrastructure spending.”

If these policies fail to materialise, that could have more serious consequences than just disappointing voters, he said.

“The risk is reality not matching up to expectations could lead to a notable pull back in the stock market and perhaps even in business and consumer spending,” McBride said. “There’s nothing on the immediate horizon that makes you think that growth is going to materialise in the near future.”

Trump had been highly critical of Yellen during the campaign, accusing her of keeping interest rates low to benefit the Obama administration — charges Yellen fervently denied. But in an interview with The Wall Street Journal in early April, the president indicated that he might be open to keeping Yellen as chair.

“I do like a low-interest rate policy, I must be honest with you,” he said.

—The Washington Post Service

Published in Dawn, The Business and Finance Weekly, May 8th, 2017