Federal Reserve keeps interest rate unchanged

The Federal Reserve has left interest rates unchanged while signalling that it expects a resilient U.S. economy and solid job market to justify further rate hikes later this year.

The Fed's pause comes after it modestly raised its benchmark short-term rate in December and March. Most economists expect it to do so again when it next meets in mid-June.

"At this point, we expect the Fed to be in wait-and-see mode in the coming weeks, as second quarter data begins to trickle in," said Michael Dolega, a senior economist with TD, in a commentary.

"Should figures over the coming weeks confirm a rebound in consumer spending and inflation, we expect the Fed raise rates in June," he said. "Still, this is far from a done deal, and potential weakness could delay any hike further into the year."

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The statement the Fed issued Wednesday after its latest policy meeting notes that the economy slowed during the January-March quarter but says it expects that slowdown to be "transitory."

Nearly eight years after the Great Recession ended, unemployment is at a low 4.5 per cent. Key sectors of the economy appear sturdy. Still, consumer spending and factory output have slowed, and inflation remains below the Fed's target rate.

The Fed remains in the midst of a campaign to gradually raise interest rates from ultra-lows. One reason for it to stand pat this week is that even though the job market has shown steady strength, the economy itself is still growing in fits and starts. On Friday, the government estimated that the economy, as gauged by the gross domestic product, grew at a tepid 0.7 per cent annual rate in the January-March quarter. It was the poorest quarterly performance in three years.

Though some temporary factors probably held back growth last quarter and might have overstated the weakness, the poor showing underscored that key pockets of the economy — consumer spending and manufacturing, for example — remain sluggish. On Monday, the government said consumer spending stalled in March for a second straight month. And the Institute for Supply Management reported a drop in factory activity.

Most economists have expressed optimism that the economy is strengthening in the current April-June quarter, fuelled by job growth, higher consumer confidence and stock-market records. Many think that annualized growth could accelerate to around 3 per cent and that the Fed will soon feel confident to resume raising rates. The global economic picture has also brightened somewhat.