U.S. Fed leaves key rate unchanged in face of slow growth

Noting slowing economic growth during the winter months, the U.S. Federal Reserve has left its key benchmark interest rate unchanged.

There was little to guide investors on when it might raise rates, which have been at the same low level since 2008.

Instead the Fed issued a statement giving the same message it has in past communiqués about rates.

"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term," it said.

Its assessment of the U.S. economy was decidedly subdued, after the Commerce department this morning estimated first quarter growth at just 0.2 per cent.

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"The pace of job gains moderated, and the unemployment rate remained steady. A range of labour market indicators suggests that underutilization of labour resources was little changed," the Fed said.

It also noted less growth in household spending and softened business fixed investment.

However, it noted that the declines in energy prices and in the price of exports from a high U.S. dollar might be transitory and allow inflation to rise in the medium term.

The Fed released its statement at 2 p.m. EDT after two days of discussion. This meeting will not include a news conference by Chair Janet Yellen or any updates to the Fed's economic forecasts.

Dovish tone

Scotiabank vice-president Derek Holt noted the "dovish" note struck by the Fed's assessment.

"On balance, there are more growth question marks, a softer assessment of labour markets, and less of a gradual reassessment of inflation risks than could have been the case particularly in terms of repeated references to import prices that probably indirectly reference US dollar appreciation prior to early March," Holt wrote in a note to investors.

Michael Gregory, deputy chief economist at BMO, said he believes the Fed note indicates it will not move on rates in June.

"When the FOMC acknowledges that there has been no improvement in the labour market and "further improvement" is both the necessary and sufficient condition for policy rate lift-off (presuming no deterioration in the key metrics on the inflation process), the Fed is signaling that June is off the table for the time being," he said.

Many economists, including TD Bank's Michael Dolega believe September timing is more likely for the rate hike.

No longer 'patient'

After its last meeting in March, the Fed opened the door to a rate increase this year by no longer saying it would be "patient" in starting to raise its benchmark rate. Most economists had said that dropping "patient" from its statement would mean the Fed could raise rates as soon as June — a step that would course through the economy and could slow borrowing and squeeze stocks and bonds.

Yet at a news conference later, Yellen stressed that while the Fed had removed "patient" to describe its approach to raising rates, it still hadn't decided when to start raising them. Yellen said any decision would depend mainly on what the latest economic data showed. And the data since then has been disappointing.

Employers added just 126,000 workers last month, the fewest since December 2013, breaking a 12-month streak of gains above 200,000. Gauges of manufacturing, housing and consumer spending of late have been weak to modest.

A sharp drop in oil and gasoline prices had been expected to help boost consumer spending. So far, it hasn't. The economic impact has been mainly negative, layoffs by oil-industry states and cutbacks in investments by energy companies.

The overall economy grew at a barely discernible annual rate of 0.2 per cent in the January-March quarter, the Commerce Department reported Wednesday.

Harsh weather inflicted damage, as did supply disruptions caused by a labour dispute at West Coast ports. But the biggest drag on the economy has been a sustained rise in the dollar's value.

Strong dollar hurts exports

The stronger dollar has hurt American manufacturers by making their goods costlier overseas. It's also made cheaper foreign imports more competitive in the United States, thereby squeezing sales of U.S. companies and depressing profits. Lower import prices have helped hold U.S. inflation below the Fed's long-run target of 2 percent rate.

William Dudley, president of the Federal Reserve Bank of New York, suggested last week that the stronger dollar would likely depress growth this year. Dudley's comments and others by Fed officials have fed the growing belief that a Fed rate hike before fall is unlikely.

"I don't think the Fed will have the necessary ingredients in place for a rate hike in June, but I expect economic growth and job gains to accelerate during the summer and that will lay the basis for a rate hike at the September meeting," said Mark Zandi, chief economist at Moody's Analytics.

Once the Fed does start raising rates, it's expected to do so very gradually.

"I look for it to be one and done for rate hikes this year, and then the frequency of moves next year will depend on how the economy is performing," said David Jones, author of several books on the Fed.

On the other hand, the timetable for a rate hike could be delayed if growth doesn't pick up or if some crisis should erupt. One such threat could be a Greek debt default that spooks financial markets.

Whenever it decides to boost rates, the Fed is expected to signal the action well in advance.