Policy-makers only tweak policy statement
WASHINGTON (MarketWatch) -- The Federal Reserve decided Wednesday to hold short-term interest rates steady and said nothing that indicates it is prepared to move interest rates anytime soon.
Following a one-day meeting of the Fed's policy-making Open Market Committee, the central bank indicated that its target for the key federal-funds interest rates, at which banks lend each other money overnight, remains 5.25%.
The vote to hold rates steady was 10-0.
In its policy statement, the Fed repeated the key statement that it could choose to move rates in either direction depending on the data even though inflation risks remain the paramount concern.
The Fed made only a few changes from its March 21 statement.
In a nod to the weak first quarter growth rate, the Fed said growth had slowed, and adjustments in housing were ongoing. The last statement had said recent indicators were "mixed."
But the Fed repeated that its outlook for a second half pickup remains on track.
"Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters," the statement said.
The Fed made no changes to its inflation outlook, saying that core inflation remains "somewhat elevated" and "although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures."
"It is kind of a yawner," said Dan Seto, economist with Sumitomo Bank. "There were minimal changes [to the statement] and none are significant," he said.
Wall Street had concluded that the Fed wouldn't make a move Wednesday and there was not much reaction in the stock market.
Read Market Snapshot."No one is really surprised," said Jay Suskind, director of trading at Ryan Beck & Co. "The market whisper was that they would show more concern about inflation."
"The market rallied back up because the flipside is that this means the economy is doing well enough and earnings will stay strong," Suskind said.
As usual, economists disagreed about what the statement's details reveal.
Some analysts had expected the Fed to tip its hat to the recent good news on inflation, so the fact that the Fed stuck to language that inflation was "elevated" was seen as hawkish.
Others said the Fed was dovish and the language saying growth has slowed was a baby-step toward an eventual ease.
Mike Moran, chief U.S. economist at Daiwa Securities, said the Fed did not intend to make any policy hints with the changes to the statement. He said the central bank simply recognized the slower growth.
"My view the Fed will be on hold steady through the rest of the year," Moran said.
The Fed hasn't made a move since last August, when it completed an unprecedented series of seventeen straight one-fourth-of-a-percentage-point rate hikes.
See MarketWatch's complete Fed coverage.Many Fed watchers on Wall Street expect rates to remain unchanged at least through midyear and maybe much longer.
The central bank expects the economy to pick up on its own during the second half of the year, with a gradual ebbing of core inflation, and is likely to be patient to see if that forecast is correct.
"They think the economy will gradually recover. There is no reason to rush and do something" [with rates], said Jim Glassman, economist at JP Morgan Chase.
Fed chairman Ben Bernanke said that the risks have grown on both sides of its forecast, meaning that growth could be lower and inflation higher.
The big question is whether the recent slowdown in the economy is the "pause that refreshes" or the start of a worrisome downward trend.
Real GDP grew only 1.3% at an annual rate in the first quarter and the outlook for consumer spending has worsened.
See full story.In addition, the April nonfarm payroll report was uniformly weak, with job growth at the slowest pace in nearly four years.
See full story.Added to the existing concern about the housing sector, the recent spike in gasoline prices has also complicated the outlook for spending.
Since January, U.S. pump gasoline prices, averaging all grades, have soared by 36% to $3 a gallon, according to Richard Berner, economist at Morgan Stanley.
One camp believes that this weakness may continue for a few more months, pushing the Fed off the sidelines with a rate cut.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, forecasts that the data between now and the next FOMC meeting on June 28 will be "substantially weaker on all fronts."
"If we're right, it would be reasonable to expect a serious shift in the Fed's stance at that meeting, followed by the first ease in August," Shepherdson said.
But some economists believe growth is not as weak, nor inflation as benign, as recent data suggest. They believe the next move by the central bank will be a rate hike.
John Ryding, chief U.S. economist at Bear Stearns, said his indicators of future inflation "point to a pickup in price pressures."
"In addition, there is evidence that the weather was a factor in the below-trend payroll reading for April," Ryding said.
Greg Robb / MarketWatch.com
