Martin Crutsinger

Fed chair: ‘significant uncertainty’ over recovery

WASHINGTON (AP) — Federal Reserve Chairman Jerome Powell warned June 16 that the U.S. economy faces a deep downturn with “significant uncertainty” about the timing and strength of a recovery. He cautioned that the longer the recession lasts, the worse the damage that would be inflicted on the job market and businesses. In testimony to Congress, Powell stressed that the Fed is committed to using all its financial tools to cushion the damage from the coronavirus. But he said that until the public is confident the disease has been contained, “a full recovery is unlikely.” He warned that a prolonged downturn could inflict severe harm — especially to low-income workers who have been hit hardest. Powell delivered the first of two days of semi-annual congressional testimony to the Senate Banking Committee before he addressed the House Financial Services Committee on June 17. Several senators highlighted the disproportionate impact of the viral outbreak and the downturn on African-Americans and Latinos. Powell expressed his agreement. “The way the pandemic has hit our economy… has been a real inequality-increaser,” the chairman said, because low-wage service jobs have been hardest hit and are disproportionately held by minorities. “That’s who’s bearing the brunt of this.” He noted that the pandemic also poses “acute risks” for small businesses and their employees. “If a small or medium-sized business becomes insolvent because the economy recovers too slow, we lose more than just that business,” he said. “These businesses are the heart of our economy and often embody the work of generations.” Several Democratic senators used their questions to Powell to press for a new congressional rescue bill that would provide increased aid for state and local governments, which face the prospect of mass layoffs because of diminished tax revenue, as well as an extension of enhanced unemployment benefits. Powell agreed that while both Congress and the Fed have supplied record-high support, the severity of the downturn may require more. “The shock that the economy received was the largest in memory,” he said, noting that the congressional response and the Fed’s response were also the largest on record. “Will it be enough? I would say that there is a reasonable probability that more will be needed both from (Congress) and the Fed.” Without further help, states and cities could be forced to lay off more employees, Powell said, which also happened after the 2008-09 recession and which, he added, slowed the recovery after that downturn. Similar layoffs now could “weigh on” the economy, he said. Powell agreed that Congress should consider extending unemployment benefits beyond their typical six-month period, on the assumption that unemployment would likely still be quite high by the end of the year. He did not weigh in on the debate over whether the extra $600 in weekly federal unemployment benefits should be extended beyond its current July 31 cutoff date, as House Democrats have proposed. “Some form of support for those people going forward is likely going to be appropriate,” he told the committee. “There are going to be an awful lot of unemployed people for some time,” he said, suggesting that workers in the travel and hotel industries, among others, will likely have to find work in different industries. Kathy Bostjancic, a senior economist at Oxford Economics, noted that Powell reiterated the cautious message he had expressed at a news conference last week. “While the economy seemingly has turned the corner, the road to full recovery is long and contingent on the public gaining confidence that the virus is contained,” Bostjancic said. “The outlook remains cautious despite … initial signs of rehiring and a bounce-back in consumer spending.” In his remarks to the lawmakers, Powell said he remains confident about the economy’s future: “Long run, I am confident we will have a full recovery.” Since March, the Fed has slashed its benchmark short-term rate to near zero, bought $2.1 trillion in Treasury and mortgage bonds to inject cash into markets and rolled out numerous lending programs to try to keep credit flowing smoothly. On June 15, the Fed announced that it will begin buying corporate bonds as part of a plan to ensure that companies can borrow during the pandemic. The Fed’s policymakers have also forecast that their key rate will remain near zero through 2022. Collectively, the central bank’s actions are credited with helping fuel an extraordinary rally in the stock market, which has nearly regained its pre-pandemic highs after a dizzying plunge in March. On June 16, Powell suggested that the drop in economic output during the current April-June quarter, as measured by the gross domestic product, will likely be the most severe on record. Many economists are forecasting that GDP could shrink at a record-setting 40 percent annual rate this quarter. While the Trump administration is forecasting a V-shaped recovery with strong growth in the second half of this year, Powell was more cautious and sought to focus concerns on low-wage workers. In a semi-annual monetary report accompanying the testimony, the Fed noted that workers with lower earnings, including minorities, were being hit especially hard by the job market disruptions. Employment has fallen nearly 35 percent for workers who were previously earning wages in the bottom fourth of wage earners, the Fed said. By contrast, employment has declined 5 percent for higher-wage earners. Because lower-wage earners are disproportionately African-American and Hispanic, unemployment has risen more sharply for those groups. Powell had said last week at a news conference that a recovery could be painfully slow, with “well into the millions” of laid-off Americans unable to regain their old jobs. That downbeat assessment had helped trigger a plunge in stock prices and prompted President Donald Trump to issue a tweet criticizing the Fed’s views. “The Federal Reserve is wrong so often,” Trump tweeted. “We will have a very good Third Quarter, a great Fourth Quarter, and one of our best ever years in 2021.” In its projections, the Fed is predicting that the economy will shrink 6.5 percent this year before growing 5 percent next year, an assessment in line with the forecasts of private economists.

As US piles up debt to aid economy, even usual critics cheer

WASHINGTON (AP) — The U.S. government has opened the spigots and let loose nearly $3 trillion to try to rescue the economy from the coronavirus outbreak — a river of debt that would have been unthinkable even a few months ago. And yet the response, even from people who built careers as skeptics of federal debt, speaks to the gravity of the crisis: Almost no one has blinked. With the U.S. economy in a frightening free-fall, they say, the government has no choice but to pour trillions into an emergency operation. Doing less would risk a catastrophe — a recession that could devolve into a full-fledged depression. And if that were to happen, the government’s fiscal health would end up far worse. What’s more, the lessons of World War II and the 2008 financial crisis suggest to many that a combination of ultra-low interest rates and eventual economic growth can keep government debts manageable and prevent a budget crisis. In a sign that investors worry more about a deep recession than about whether the government might eventually struggle to repay its escalating debt, the yield on the benchmark 10-year Treasury note remains well less than 1 percent. Many analysts say that while soaring federal debt may end up slowing an eventual recovery, there won’t be any recovery if the government doesn’t borrow and spend aggressively now. “Like most folks, I’m not especially concerned about deficit and debt now,” said Donald Marron, director of the Tax Policy Center, a Washington think tank. “Interest rates remain low. Immediate health and economic concerns must take precedence.’’ Nonetheless, the numbers are shocking. After Congress passed four programs to sustain the economy through the COVID-19 crisis, the budget deficit — the gap between what the government spends and what it collects in taxes — will hit a record $3.7 trillion this year, according to the Congressional Budget Office. On May 4, the Treasury Department announced that it will borrow $2.99 trillion in the April-June quarter, blowing away the previous quarterly record of $569 billion, set in the recession year of 2008, and eclipsing the $1.28 trillion it borrowed in the bond market in all of 2019. By the time the budget year ends in September, the government’s debt — its accumulated annual deficits — will equal 101 percent of the U.S. gross domestic product, according to the CBO. Policymakers are trying to fend off catastrophe. The lockdowns and travel curbs meant to contain the virus are battering the economy. GDP is expected to fall at a 40 percent annual rate from April through June. That would be the worst quarter on record dating to 1947. Thirty million Americans have sought unemployment benefits since the virus struck. Even before the health crisis, the government’s debt to the public, swollen by President Donald Trump’s 2017 tax cuts, amounted to more than 80 percent of GDP, highest level since 1950. The nation has been here before. In 1946, the year after World War II ended, federal debt peaked at nearly 109 percent of GDP. By 1962, the debt burden had dropped below the 1940 level of 44 percent of GDP. The surging postwar economy poured tax revenue into government coffers. In some ways, things are different now. The economy doesn’t grow as fast. From 1947 through 1962, the economy averaged a robust, debt-erasing 3.5 percent annual growth. It’s unlikely to achieve anything that impressive anytime soon. Since 2010, GDP growth has averaged just 2.3 percent annually. Economists have long worried about the consequences of big government debts. When the government takes on debt, the argument goes, it competes with private borrowers for loans. It “crowds out’’ private investment, heightens borrowing rates and threatens growth. But after the financial crisis, economists began to rethink their approach to debt. The recovery from the Great Recession, in the United States and especially in Europe, was sluggish in part because policymakers declined to juice growth with more debt. The 19 European countries that share the euro currency slid back into recession in 2011. As their economies slumped, their debt problems worsened. In the United States, rates didn’t rise much even as the economy gradually strengthened. It turns out investors have a near-insatiable appetite for U.S. Treasurys, given their status as the world’s safest investment. Their rush to buy Treasurys helped lower the government’s borrowing costs. So did persistently low inflation. In such a low-rate, low-inflation environment, the risk of piling on debt seems more manageable, at least for countries like the United States and Japan that borrow in their own currencies. “We can worry much less about the amount of debt than most economists guessed,” said Douglas Elmendorf, a former CBO director and now dean of the Harvard Kennedy School who for years has been a critic of runaway federal debt. Today’s U.S. policymakers enjoy the support of the Federal Reserve, which has been flooding the market with cash and keeping borrowing costs ultra-low. Fed Chairman Jerome Powell took the unusual step at a news conference last week of imploring Congress not to worry right now about the risk that its aggressive rescue programs will produce excessive debt. “I have long time been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective,” Powell said. “This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through.” Likewise, Olivier Blanchard, a former chief economist of the International Monetary Fund, challenged the old consensus on government debt in a speech last year: “Put bluntly, public debt may have no fiscal cost… The probability that the U.S. government can do a debt rollover, that it can issue debt and achieve a decreasing debt to GDP ratio without ever having to raise taxes later, is high.’’ Then again, the future might not be like the recent past. Mark Zandi, chief economist at Moody’s Analytics, said he thinks rates will eventually start rising as the economy regains health, perhaps in 2022 or 2023. “There’s going to be a day of reckoning,” Zandi said. “We are going to as a nation have to address these deficits and debts. We’re going to have to raise taxes. We’re going to have to restrain spending.’’ But for now, he said, “You have to respond with everything you’ve got to make sure the economy doesn’t completely fall apart.’’ “The question is not: How much does this cost? But rather: How much will debt go up if we do this, versus if don’t do this?’’ said Richard Kogan, senior fellow at the Center on Budget and Policy Priorities and a budget adviser in the Obama administration.

US trade deficit falls to $52.5B in September

WASHINGTON (AP) — The U.S. trade deficit fell in September to the lowest level in five months as imports dropped more sharply than exports and America ran a rare surplus in petroleum. The Commerce Department said Nov. 5 that the September gap between what America buys from abroad and what it sells shrank by 4.7 percent to $52.5 billion. That was down from the August deficit of $55 billion and was the smallest imbalance since April. The politically sensitive deficit with China edged down 0.6 percent to $31.6 billion. President Donald Trump has imposed tariffs on more than $360 billion in Chinese imports. China has retaliated with its own tariffs on American products as the world’s two largest economies have engaged in a trade war that has rattled global financial markets and slowed economic growth. The September deficit reflected the fact that exports fell 0.9 percent to $206 billion but imports fell an even faster 1.7 percent to $258.4 billion. For the first nine months of this year, the U.S. deficit is running 5.4 percent below the same period a year ago. The deficit for all of 2018 totaled $627.7 billion. Economists said they expect the trade deficit will be a drag on growth in the current October-December quarter as the continued weakness of the global economy further depresses demand for American exports. “It’s hard to see anything other than further weakness in exports over the coming months,” said Andrew Hunter, senior U.S. economist at Capital Economics. So far this year, the deficit with China is 12.8 percent lower than the same period a year ago although it remains the largest imbalance America runs with any country. The two countries are currently trying to complete a phase one trade deal that would deal with some of the administration’s complaints that China is stealing U.S. technology and pursuing other unfair trade practices. Investors are hoping that a phase one agreement will halt the imposition of any further tariffs. Those tariffs have disrupted global supply chains and caused businesses to pull back on their investment spending, resulting in slower economic growth in the U.S. and other countries. The September trade report showed that the U.S. ran the first surplus in petroleum in more than four decades, according to government records that go back to 1978. The small $252 million surplus reflected the fact that the United States exported $15 billion in petroleum products in September while importing $14.7 billion. U.S. petroleum exports have been growing in recent years, reflecting a boom in new production methods such as fracking. In addition to sparring with China, Trump has imposed import taxes on foreign steel and aluminum and is threatening to tax imported autos, too. Trump views America’s persistent trade deficits as a sign of economic weakness and the result of unfair trade agreements which he says have resulted in the loss of millions of American manufacturing jobs. But mainstream economists say the trade gap is the product of economic forces that don’t respond much to changes in trade policy such as a strong dollar, which makes U.S. goods more expensive on overseas markets, and the fact that Americans consume more than they produce with imports filling the gap. In September, the United States recorded a $71.7 billion deficit in the trade of goods such as cars and appliances. But it ran a $19.3 billion surplus in the trade of services such as banking and education.

US deficit hits nearly $1 trillion. When will it matter?

WASHINGTON (AP) — The Trump administration reported a river of red ink Oct. 25. The federal deficit for the 2019 budget year surged 26 percent from 2018 to $984.4 billion — its highest point in seven years. The gap is widely expected to top $1 trillion in the current budget year and likely remain there for the next decade. The year-over-year widening in the deficit reflected such factors as revenue lost from the 2017 Trump tax cut and a budget deal that added billions in spending for military and domestic programs. Forecasts by the Trump administration and the Congressional Budget Office project that the deficit will top $1 trillion in the 2020 budget year, which began Oct. 1. And the CBO estimates that the deficit will stay above $1 trillion over the next decade. Those projections stand in contrast to President Donald Trump’s campaign promises that even with revenue lost initially from his tax cuts, he could eliminate the budget deficit with cuts in spending and increased growth generated by the tax cuts. Here are some questions and answers about the current state of the government’s finances. What happened? The deficit has been rising every year for the past four years. It’s a stretch of widening deficits not seen since the early 1980s, when the deficit exploded with President Ronald Reagan’s big tax cut. For 2019, revenues grew 4 percent. But spending jumped at twice that rate, reflecting a deal that Trump reached with Congress in early 2018 to boost spending. Why doesn’t Washington do something about it? Fiscal hawks have long warned of the economic dangers of running big government deficits. Yet the apocalypse they fear never seems to happen, and the government just keeps on spending. There have been numerous attempts by presidents after Reagan to control spending. President George H.W. Bush actually agreed to a tax increase to control deficits when he was in office, breaking his “Read my lips” pledge not to raise taxes. And a standoff between President Bill Clinton and House Speaker Newt Gingrich did produce a rare string of four years of budget surpluses from 1998 through 2001. In fact, the budget picture was so bright when George W. Bush took office in 2001 that the Congressional Budget Office projected that the government would run surpluses of $5.6 trillion over the next decade. That didn’t happen. The economy slid into a mild recession, Bush pushed through a big tax cut and the war on terrorism sent military spending surging. Then the 2008 financial crisis erupted and triggered a devastating recession. The downturn produced the economy’s first round of trillion-dollar deficits under President Barack Obama and is expected to do so again under Trump. Should we worry? As far as most of us can tell, the huge deficits don’t seem to threaten the economy or elevate the interest rates we pay on credit cards, mortgages and car loans. And in fact, the huge deficits are coinciding with a period of ultra-low rates rather than the surging borrowing costs that economists had warned would likely occur if government deficits got this high. There is even a new school of economic theory known as the “modern monetary theory.” It argues that such major economies as the United States and Japan don’t need to worry about running deficits because their central banks can print as much money as they need. Yet this remains a distinctly minority view among economists. Most still believe that while the huge deficits are not an immediate threat, at some point they will become a big problem. They will crowd out borrowing by consumers and businesses and elevate interest rates to levels that ignite a recession. What’s more, the interest payments on the deficits become part of a mounting government debt that must be repaid and could depress economic growth in coming years. In fact, even with low rates this year, the government’s interest payments on the debt were one of the fastest growing items in the budget, rising nearly 16 percent to $375.6 billion. Haven’t economists been making these warning for decades? Federal Reserve Chairman Jerome Powell says the day of reckoning is still coming but isn’t here yet. Most analysts think any real solution will involve a combination of higher taxes and cost savings in the government’s huge benefit programs of Social Security and Medicare. Any sign that Washington may take the politically painful steps to cut the deficit? In short, no. There has been a major change since the first round of trillion-dollar deficits prompted the Tea Party revolt. This shift brought Republicans back into power in the House and incited a round of fighting between GOP congressional leaders and the Obama administration. A result was government shutdowns and near-defaults on the national debt. But once Trump took office, things changed: The president focused on his biggest legislative achievement, the $1.5 trillion tax cut passed in 2017. This appeared to satisfy Republican lawmakers and quelled concerns about rising deficits. Democratic presidential candidates have for the most part pledged to roll back Trump’s tax cuts for corporations and wealthy individuals. But they would use the money not to lower the deficits but for increased spending on expensive programs such as Medicare for All. So the deficits won’t animate the presidential campaign? It doesn’t seem likely, though former Rep. Mark Sanford, who has mounted a long-shot Republican campaign against Trump, is urging Republican voters to return to their historic concerns about the high deficits. And economists note that today’s huge deficits are occurring when the economy is in a record-long economic expansion. This is unlike the previous stretch of trillion-dollar deficits, which coincided with the worst recession since the 1930s. But analysts warn that if the economy does go into a recession, the huge deficits projected now will expand significantly — possibly to a size that would send interest rates surging. Such a development, if it sparked worries about the stability of the U.S. financial system, might produce the type of deficit crisis they have been warning about for so long.

US economy grew at modest 2 percent rate in second quarter

WASHINGTON (AP) — The U.S. economy grew at a modest 2 percent annual rate in the second quarter, a pace sharply lower than the 3 percent-plus growth rates seen over the past year. Many analysts believe growth will slow further in coming quarters as global weakness and rising trade tensions exert a toll. The April-June increase in the gross domestic product, the economy’s total output of goods and services, slipped from a brisk 3.1 percent gain in the first quarter, the Commerce Department reported Sept. 26. The government’s third and final look at second-quarter GDP growth was the same as the previous estimate, although the components were slightly altered. Consumer spending and business investment rose at slower rates than previously estimated, but this was offset by slightly stronger gains in government spending and exports. In the current quarter, analysts believe GDP is likely growing at the same modest 2 percent rate, and they are forecasting a similar outcome in the final quarter. For the year, GDP is expected to rise around 2.2 percent, down from the strong 2.9 percent gain seen last year, which had been the best performance since 2015. President Donald Trump, who is counting on a strong economy to boost his re-election bid, has called the economy’s performance the best ever. But after a spurt in growth last year due to the president’s $1.5 trillion tax cut program, growth has slowed noticeably to slightly below the 2.2 percent annual growth rates turned in during the current economic expansion. While the economic recovery from the Great Recession is now in its 11th year, the longest in U.S. history, it has been the slowest in terms of annual growth rates, a fact economists attribute to slower growth in the labor market, due to the retirement of baby boomers, and a slowdown in productivity. Trump, however, repeatedly attacked Obama administration economic policies for the lackluster GDP rates and pledged to achieve annual growth above 3 percent with his economic program of big tax cuts, deregulation and tougher enforcement of trade laws. The economy has achieved four quarters of 3 percent-plus GDP rates since Trump took office in early 2017, but economists doubt that this pace can be achieved on a sustained basis given the labor force and productivity issues facing the country. This year’s expected slowdown has been attributed to a fading of the impact of the Trump tax cuts as well as adverse effects of Trump’s trade war with China. Mark Zandi, chief economist at Moody’s Analytics, said that if Trump carries through with an escalation of the tariffs nest month and in December, it could be enough to push the country into a recession next year. “It all hinges on the president and what he decides to do with trade,” Zandi said. “If he follows through on this tariff threats later this year, then in all likelihood growth will slow and we would end up in a recession next year.” Zandi is forecasting that GDP growth this year will slow to 2.3 percent and then slow further to 1.6 percent next year, but that is based on no escalation in the trade war with China. The GDP report showed that consumer spending, which accounts for 70 percent of economic activity, came in at a sizzling rate of 4.6 percent, the best quarterly performance since late 2014, but down slightly from last month’s estimate of a 4.7 percent rate of gain for consumer spending. Spending by the federal government and state and local governments increased at a 4.8 percent rate in the spring, up from last month’s estimate of a 4.5 percent gain. In a separate report, the Labor Department said Sept. 26 that the number of Americans filing initial claims for unemployment benefits, a proxy for layoffs, rose by 3,000 last week to 213,000. That is still a low level indicating a strong labor market.

Powell signals that Fed rate cut could be coming soon

WASHINGTON (AP) — Chairman Jerome Powell signaled July 10 that the Federal Reserve is likely to cut interest rates late this month for the first time in a decade in light of a weakening global economy and rising trade tensions. Delivering the central bank’s semiannual report to Congress, Powell said that since Fed officials met last month, “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.” In addition, annual inflation has dipped further below the Fed’s annual target level. Powell’s remarks triggered a stock market rally, with the Dow Jones industrial average up nearly 100 points in late-morning trading. Economists suggested that Powell’s message made a quarter-point rate cut a virtual certainty at the Fed’s meeting this month, with many forecasting further rate cuts to come. Paul Ashworth, chief U.S. economist at Capital Economics, said he thinks economic growth will slow below a 1 percent annual rate in the second half of this year, which he thinks will lead to additional quarter-point cuts in December and then March. Ashworth said a July rate cut would be “insurance against the downside risk that Fed officials believe have mounted in recent months.” Many investors have put the odds of a rate cut this month at 100 percent. The Fed’s benchmark rate stands in a range of 2.25 percent to 2.5 percent after the central bank raised rates four times last year — action that incited public attacks on the Powell Fed from President Donald Trump. Trump, who is counting on a strong economy for his re-election campaign, has called the Fed his biggest threat. He contends that the central bank made a huge mistake by tightening credit last year and should be cutting rates now. Trump has argued that last year’s rate hikes have held back economic growth and the stock market. In his prepared remarks, Powell made no mention of the president’s criticism. He did thank Congress for the “independence” it has given the Fed to operate free of political intrusion. But later, in the question-and-answer period, Democratic members of the House Financial Services Committee, made clear their discontent with Trump’s attacks. Rep. Maxine Waters, who leads the committee, declared that “this president has made it clear that he has no understanding or respect for the independence of the Federal Reserve.” She also referred to published reports that Trump had discussed firing Powell. Asked by Waters what he would do if Trump said he wanted to fire him, Powell replied, as he has in the past, that he intends to serve his full four-year term. Powell’s remarks July 10 began two days of his testimony on Capitol Hill. On July 11, he addressed the Senate Banking Committee. At the moment, the U.S. economic landscape is a mixed one: The job market appears resilient, but economic growth is slowing. Many forecasters predict that growth has slowed to an annual rate of around 2 percent in the just completed April-June quarter. In his testimony, Powell said the economy has fared reasonably well over the first half of the year. But he noted that “crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook.” He said that growth in business investment “seems to have slowed notably,” possibly because of concerns over slowing global growth and the trade battle between the Trump administration and China. The Fed chairman told the House committee that he thinks average worker pay isn’t rising fast enough to accelerate low inflation, even with the unemployment rate near a five-decade low. An absence of inflation pressure makes it easier for the Fed to cut short-term rates. Referring to rates, Powell repeated a pledge the Fed made in its June policy statement that officials would “act as appropriate to sustain the expansion.” But notably, he added that “many” Fed official saw that the case for a looser monetary policy “had strengthened.” The Fed hasn’t cut rates since 2008 at the height of the financial crisis. Trump and Chinese President Xi Jinping declared a truce last month in what had threatened to become an escalating U.S.-China trade war and agreed to resume talks toward a deal that would meet the administration’s demands to better protect U.S. technology. That step eased fears that Trump would extend punitive tariffs to an additional $300 billion in Chinese goods, in the process inviting retaliation from Beijing on American exports and likely weakening both nations’ economies. And last week the government reported that after a tepid job gain in May, U.S. employers sharply stepped up their hiring in June, an indication of the economy’s durability. A wild card in the Fed’s decision-making has been Trump’s highly unusual public pressure on the central bank to cut rates sharply. Trump’s attacks have raised alarms that he is undermining the Fed’s long-recognized independence from political pressure.

Federal Reserve leaves benchmark rate unchanged

WASHINGTON (AP) — The Federal Reserve left its key interest rate unchanged May 1 and signaled that it’s unlikely to either raise or cut rates in coming months amid signs of renewed economic health but unusually low inflation. The Fed left its benchmark rate — which influences many consumer and business loans — in a range of 2.25 percent to 2.5 percent. Its low-rate policy has helped boost stock prices and supported a steadily growing economy. A statement from the Fed spotlighted its continuing failure so far to lift annual inflation to at least its 2 percent target rate. The Fed’s preferred 12-month inflation barometer is running at about 1.5 percent. In pointing to persistently low inflation, the statement might have raised expectations that the Fed’s next rate change, whenever it happens, could be a rate cut. The Fed cuts rates when it’s trying to stimulate inflation or growth. But at a news conference later, Chairman Jerome Powell declined to hint of any potential coming rate cut. He suggested, in fact, that the current too-low inflation readings may be transitory or might not be fully capturing real-world price increases. “The committee is comfortable with our current policy stance,” Powell said. The chairman’s comments appeared to deflate a modest stock market rally that occurred after the Fed issued its statement, with its mention of unusually low inflation. Stock losses deepened later in the afternoon, with the Dow Jones industrial average ending the day down 162 points. In its statement May 1, the Fed announced a technical adjustment to reduce the interest it pays banks on reserves as a way to keep its benchmark rate inside its approved range, rather than at the upper end of that range. The central bank’s decision to make no change in its rate policy — approved on a 10-0 vote — had been expected despite renewed pressure from President Donald Trump for the Fed to cut rates aggressively to help accelerate economic growth. The Fed sketched a more upbeat view of the economy, saying “economic activity rose at a solid rate.” In March, the Fed had said it appeared that growth had slowed from the fourth quarter of last year. The generally brighter outlook for the economy and the stock market represents a sharp rebound from the final months of 2018, when concerns about a possible global recession and fear of further Fed rate increases had darkened the economic picture. Stock prices tumbled late last year, especially after the Fed in December not only raised rates for the fourth time in 2018 but suggested that it was likely to keep tightening credit this year. Yet starting in January, the Fed engineered an abrupt reversal, suggesting that it was finished raising rates for now and might even act this year to support rather than restrain the economy. Its watchword became “patient.” And investors have responded by delivering a major stock market rally. The market gains have also been fed by improved growth prospects in China and some other major economies and by the view that a trade war between the world’s two biggest economies, the United States and China, is nearing a resolution. Last month, the government reported that the U.S. economy grew at a surprisingly strong 3.2 percent annual rate in the January-March quarter. It was the best performance for a first quarter in four years, and it far surpassed initial forecasts that annual growth could be as weak as 1 percent at the start of the year. If economic prospects were to brighten further, could Fed officials rethink their plans to suspend further rate hikes and perhaps resume tightening credit? Possibly. But investors don’t seem to think so. According to data tracked by the CME Group, investors foresee zero probability that the Fed will raise rates anytime this year. And in fact, their bets indicate a roughly 60 percent likelihood that the Fed will cut rates before year’s end. One factor in that dovish view is that the economy might not be quite as robust as the latest economic figures suggest. The first quarter’s healthy 3.2 percent annual growth rate was pumped up by some temporary factors — from a surge in restocking of companies’ inventories to a narrowing of the U.S. trade deficit — that are expected to reverse themselves. If so, this would diminish the pace of growth and likely hold down inflation. Indeed, for all of 2019, growth is expected to total around 2.2 percent, down from last year’s 2.9 percent gain, as the effects of the 2017 tax cuts and billions of dollars in increased government spending fade. At the same time, the Fed is still struggling to produce inflation of roughly 2 percent. This week, the government reported that the Fed’s preferred inflation gauge rose just 1.5 percent in March from 12 months earlier. Many analysts say they think the Fed won’t resume raising rates until inflation hits or exceeds its 2 percent target. Too-low inflation is seen as an obstacle because it tends to depress consumer spending, the economy’s main fuel, as people delay purchases in anticipation of flat or even lower prices. It also raise the inflation-adjusted cost of a loan. In the meantime, President Donald Trump has attacked Powell’s leadership as being too restrictive toward rates and has pressed the Fed to cut rates — something few mainstream economists favor. On April 30, Trump tweeted that the U.S. economy has “the potential to go up like a rocket” if the Fed would only slash rates and resume the emergency bond buying programs it unveiled after the Great Recession to ease long-term loan rates to stimulate spending and growth. Asked at this news conference about Trump’s attacks, Powell replied that the Fed is a “nonpolitical institution” that doesn’t consider outside criticism in making its policy decisions. “We don’t think about other factors” beyond how the economy and financial system are faring, Powell said. He said the Fed’s rate-setting panel thinks its rate policies are “in a good place.”

US productivity grows at solid 3.6 percent rate in first quarter

WASHINGTON (AP) — U.S. productivity grew at a solid 3.6 percent rate in the first three months of this year, the strongest quarterly gain in more than four years and a hopeful sign that a long stretch of weak productivity gains may be coming to an end. The first quarter increase in productivity was more than double the 1.3 percent rate of gain in the fourth quarter, the Labor Department reported May 2. Labor costs actually fell in the first quarter, dropping at an annual rate of 0.9 percent, indicating that tight labor markets are not creating unwanted wage and inflation pressures. If it continues, an uptick in productivity would be good news for President Donald Trump and his goal of achieving sustained economic growth above 3 percent. Productivity, the amount of output per hour of work, is a key factor determining an economy’s growth potential. With the strong gain in the first quarter, productivity over the past year has grown by 2.4 percent, the best four-quarter gain since a 2.7 percent rise in 2010. Productivity gains over the past decade have for the most part been lackluster, averaging annual gains of just 1.3 percent from 2007 through 2018. That was less than half the 2.7 percent gains seen from 2000 to 2007, a period when the economy was benefiting from technology improvements in computers and the internet. From 1947 through 2018, annual productivity gains averaged 2.1 percent. Economists have labeled the slowdown in productivity since the Great Recession as one of the country’s biggest challenges. However, recent signs have indicated that may be turning around. The economy’s potential to grow is governed by two major factors, growth of the labor force and growth in productivity. The overall economy, as measured by the gross domestic product, expanded at a surprisingly robust 3.2 percent annual rate in the first three months of this year. For all of 2018, GDP growth was 2.9 percent. The Trump administration has projected sustained GDP gains of 3 percent or better over the next decade, well above the 2.2 percent average GDP gains seen since the current expansion began in June 2009. In a separate report May 2, the Labor Department said that applications for unemployment benefits, a proxy for layoffs, held steady at 230,000 last week. That is a low level that indicates a strong job market. The government released its April jobs report on May 3 showing growth of 263,000 jobs. In March, employers created 196,000 jobs while the unemployment rate stayed at 3.8 percent, the lowest level in nearly 50 years.

US consumer spending surges 0.9 percent in March

WASHINGTON (AP) — U.S. consumer spending surged 0.9 percent in March, the biggest gain in nearly a decade, as inflation pressures remain non-existent. The March gain was the biggest monthly increase since August 2009, the Commerce Department reported April 29. That’s a marked improvement after three months of lackluster readings in this key segment of the economy. Consumer spending accounts for 70 percent of economic activity. Incomes grew 0.1 percent in March while inflation rose just 0.2 percent and has risen only 1.5 percent over the past 12 months, far below the Federal Reserve’s 2 percent target for inflation. The big jump in consumer spending is encouraging because it suggests that the overall economy had solid momentum going into the April-June quarter. The government reported April 26 that the economy, as measured by the gross domestic product, grew at a surprisingly strong 3.2 percent, helped by the March surge in consumer spending. However, economists noted that about half of the first quarter strength came from a big rise in inventory stocking by businesses and by a sharp narrowing in the trade deficit. Both of those gains were expected to be temporary and that could subtract from growth in the current quarter. The 0.9 percent March jump in spending followed a sharp 0.6 percent drop in December and tiny gains of 0.3 percent in January and 0.1 percent in February. The slight 0.1 percent rise in incomes in March followed a modest 0.2 percent rise in February and a 0.1 percent decline in January. With the big rise in spending and the small increase in incomes, the household saving rate fell to 6.5 percent of after-tax income in March, the lowest level since November when it was 6.2 percent. The 1.5 percent year-over-year increase in consumer prices was up from a 1.3 percent 12-month gain in February but still well below the Fed’s target. The absence of inflation pressures was a key reason that the central bank did an about-face this year and announced that after boosting its benchmark interest rate four times in 2018, it planned to be “patient” and expected that it would not raise rates at all in 2019. That change has helped spur a big rally in the stock market as investors stopped worrying that the Fed was in danger of over-doing its credit tightening campaign and might drive the economy into a recession.

Fed likely to underscore a message: No rates hikes in 2019

WASHINGTON (AP) — The Federal Reserve this week will likely reinforce a theme that has cheered consumers and investors since the start of the year: No interest rates hikes are likely anytime soon. The prospect of continued low rates is keeping borrowing costs low for households and companies. It is helping drive record highs in the stock market. It is supplying fuel for a U.S. economy that’s growing steadily but fairly modestly and until recently was seen as facing the risk of a recession. And with inflation remaining unusually mild, the Fed is seen as able to stay on the sidelines through year’s end and perhaps beyond. The Fed will likely express that belief in a statement when its latest policy meeting ends May 1 and in a news conference that Chairman Jerome Powell will hold afterward. “The Fed will recognize the brighter economic outlook, but there will be no change at this meeting,” said David Jones, an economist and author of books about the Fed. The generally brighter view of the economy and the stock market represents a sharp rebound from the final months of 2018, when concerns about a possible global recession and fear of further Fed rate increases had darkened the economic picture. Stock prices tumbled in the final quarter of the year, especially after the Fed in December not only raised rates for the fourth time in 2018 but suggested that it was likely to keep tightening credit this year. Yet beginning in January, the Fed engineered an abrupt reversal, suggesting that it was finished raising rates for now and might even act this year to support rather than restrain the economy. In characterizing its stance, the Fed’s new watchword became “patient.” And investors have responded by delivering a major stock market rally. The market gains have also been fed by improved growth prospects in China and some other major economies and by the view that a trade war between the world’s two biggest economies, the United States and China, is moving closer to a resolution. On April 26, the government reported that the U.S. economy grew at a surprisingly strong 3.2 percent annual rate in the January-March quarter. It was the best performance for a first quarter in four years, and it far surpassed initial forecasts that annual growth could be as weak as 1 percent at the start of the year. If economic prospects were to brighten further, could Fed officials rethink their plans to suspend further rate hikes and perhaps resume tightening credit? Possibly. But investors don’t seem to think so. According to data tracked by the CME Group, investors foresee zero probability that the Fed will raise rates anytime this year. And in fact, their bets indicate a roughly 64 percent likelihood that the Fed will cut rates before year’s end. One factor in that dovish view is that the economy might not be quite as robust as the latest economic figures suggest. The first quarter’s healthy 3.2 percent annual growth rate was pumped up by some temporary factors — from a surge in restocking of companies’ inventories to a narrowing of the U.S. trade deficit — that are expected to reverse themselves. If so, this would diminish the pace of growth and likely hold down inflation. “We are still confronting a global slowdown, with 70 percent of the global economy slowing,” said Diane Swonk, chief economist at Grant Thornton. Indeed, for all of 2019, growth is expected to total around 2.2 percent, down from last year’s 2.7 percent gain, as the effects of the 2017 tax cuts and billions of dollars in increased government spending fade. At the same time, the Fed is still struggling to achieve one of its mandates: To produce inflation of roughly 2 percent. On April 29, the government reported that the Fed’s preferred inflation gauge rose just 1.5 percent in March from 12 months earlier. Many analysts say they think the Fed won’t resume raising rates until inflation hits or exceeds its 2 percent target. Too-low inflation is seen as an obstacle because it tends to depress consumer spending, the economy’s main fuel, as people delay purchases in anticipation of flat or even lower prices. It also raise the inflation-adjusted cost of a loan. “They will express concerns about the low inflation numbers,” Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles, predicts of Fed officials this week. Sohn foresees a roughly 50-50 chance that the Fed will end up cutting rates before year’s end, at least in part over concerns about low inflation. President Donald Trump and Larry Kudlow, head of his National Economic Council, have urged the Fed to cut rates. Last week, Trump asserted that annual economic growth would have reached 5 percent last quarter, instead of 3.2 percent, had the Fed provided rates as low as the ones that prevailed during the Obama administration, when the economy was recovering from the devastating 2008 financial crisis. In recent months, Trump tapped two conservative political allies for vacancies on the Fed’s influential board in hopes that they would push for lower rates and counter the influence of Powell, whose leadership Trump has repeatedly attacked. One of them, Herman Cain, has since withdrawn. But the other, Stephen Moore, is aggressively campaigning for the board seat despite criticism of his qualifications and sometimes inflammatory writings. As recently as December, Moore was publicly calling for Trump to try to fire Powell. Most analysts say they think Powell will stick to his public position that the Fed will keep pursuing its goals of maximum employment and stable inflation without regard to outside influence. “This pressure will not affect the Fed’s decisions, but it does undermine confidence in the Fed, and that sets a dangerous precedent,” Swonk said.

Fed officials adjust rate strategy amid strengthening economy

WASHINGTON (AP) — Federal Reserve officials last month said they expect to keep raising interest rates and suggested that by next year, they could be high enough that they could start slowing growth, according to minutes of their discussion released July 5. While highlighting a strong economy, Fed officials appeared vigilant about emerging risks, especially trade tensions, and the dangers of an economy that might overheat. The officials noted heightened concerns from businesses about President Donald Trump’s get-tough trade policies and that some executives had already scaled back future spending plans because of the uncertainty. They also said they were monitoring changes in market-set interest rates. A narrowing in the gap between short-term and long-term rates has been an accurate predictor of downturns in the past. Economists said the minutes of the June discussions did not alter their overall view of what the Fed would do this year. “We continue to expect that fiscal stimulus will push the unemployment rate lower over time and lead the Fed to hike rates two more times this year, in September and December,” said Barclays economist Michael Gapin. The minutes covered the discussions at the Fed’s June 12-13 meeting in which the central bank boosted its key rate for a second time this year to a new range of 1.75 percent to 2 percent. Fed officials also increased their projection for the number of rate hikes they plan to make this year from three to four. The Fed dropped language it had been using for a number of years promising to keep rates at levels that would boost economic growth “for some time.” The change was made because officials believed it “was no longer appropriate in light of the strong state of the economy and the current expected path for policy,” the minutes said. Officials discussed the fact that under their expected path, its key policy rate, known as the federal funds rate, could be at or even above the neutral level — the point at which the rate is neither stimulating economic growth or holding it back. In the Fed’s latest projection, the neutral rate stood at 2.9 percent. But it forecast a higher benchmark rate of 3.1 percent by the end of next year. The projections have the funds rate rising to 3.4 percent by the end of 2020. As such, a number of officials believed it might soon be appropriate to drop the language in the policy statement indicating that the stance of monetary policy “remains accommodative.” That is the phrase the Fed uses to say that rates are still low enough to stimulate growth. Despite current growth prospects and inflation finally reaching the Fed’s goal of 2 percent annual gains in prices, the minutes noted a number of “risks and uncertainties” facing the economy. Officials said that the risks associated with trade policy had “intensified,” with the uncertainty potentially hurting business sentiment and investment spending.” The Trump administration has imposed tariffs on steel and aluminum imports. He has also threatened to impose tariffs on billions of dollars in other Chinese products, including tariffs on $34 billion in Chinese goods that took effect July 6. Beijing has promised to retaliate with tariffs on U.S. goods, including farm products such as soybeans. Trump has staked out a tougher approach on trade in an effort to achieve his goal of dramatically shrinking America’s huge trade deficits, which he has blamed for the loss of millions of U.S. factory jobs.

Fed raises key interest rate by a quarter-point

WASHINGTON (AP) — The Federal Reserve is raising its benchmark interest rate and signaling that it is sticking with a gradual approach to rate hikes under its new Chairman Jerome Powell. The Fed on March 21 boosted its key short-term rate by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent and said it will keep shrinking its bond portfolio. Both steps show confidence that the U.S. economy remains sturdy nearly nine years after the Great Recession ended. The actions mean consumers and businesses will face higher loan rates over time. The Fed’s rate hike marks its sixth since it began tightening credit in December 2015. It is sticking with the forecast it issued in December for three increases in 2018. But it did boost its 2019 estimate from two hikes to three. Speaking to Congress last month, Powell said his “personal outlook” on the economy had strengthened since December, when the Fed’s policymakers collectively forecast three rate hikes for 2018, the same as in 2017. That comment helped send stocks tumbling because it suggested that the Fed might be about to accelerate the gradual pace it had pursued under his predecessor, Janet Yellen. More aggressive rate increases would likely slow the economy and make stocks less appealing. Yet when he testified to Congress again two days later, Powell tempered his view: He stressed that the Fed still thinks it has room to maintain a moderate pace of rate hikes, in part to allow Americans’ average wages, which have stagnated for years, to pick up. The impression was that he might not favor raising rates faster than Yellen did after all — at least not yet. A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates. The financial markets have been edgy for weeks, and Powell’s back-and-forth comments have been only one factor. A sharp rise in wage growth reported in the government’s January jobs report triggered fears that higher labor costs would lead to higher inflation and, ultimately, to higher interest rates. Stocks sank on the news. But subsequent reports on wages and inflation have been milder, and the markets appear to have stabilized. The February jobs report pointed to an unusually robust labor market: Employers added 313,000 jobs, the largest monthly gain in 1½ years. The unemployment rate remained at a 17-year low of 4.1 percent. Other measures of the economy, though, have been more sluggish. Consumer spending, the economy’s primary fuel, has slowed this year and has led many economists to downgrade their forecasts for growth in the January-March quarter. Some now envision an annual growth rate of just 1.7 percent for the quarter. Forecasts for all of 2018, though, still predict an acceleration later this year, driven in part by the stimulative effect of the sweeping tax cuts President Donald Trump pushed through Congress in December and a budget agreement last month to raise government spending by $300 billion over two years. If economic growth does pick up and the job market remains healthy, the Powell Fed is viewed as likely to accelerate its rate hikes, from the three it projected in December to four this year. Even after six rate increases over the past 27 months, the Fed’s benchmark rate remains in a still-low range of 1.5 percent to 1.75 percent, up from a record low near zero as recently as December 2015. The Fed’s slighter higher key rate has, however, contributed to higher consumer loan rates, including for home mortgages. Some economists say they think Powell will try to demonstrate at the start of his tenure that he is serious about keeping inflation under control, a central responsibility for any Fed leader.

Fed chair nominee favors easing rules that hurt small banks

WASHINGTON (AP) — Jerome Powell, President Donald Trump’s pick to be chairman of the Federal Reserve, told senators at his confirmation hearing Nov. 28 that he believes some bank regulations can be rolled back — something the administration and Wall Street favor. But he stressed that he will protect the central bank’s political independence, calling it vital for the Fed’s role. Powell also strongly hinted in his appearance before the Senate Banking Committee that the Fed would hike rates again in December. Powell said he believed that the Dodd-Frank Act, passed in the wake of the devastating 2008 financial crisis, had succeeded in making the financial system stronger, including ensuring that no major institution now is too big to fail. But in some areas such as regulation of smaller banks, the law had imposed unnecessary burdens that should be eased, he said. Powell’s comments pleased many GOP senators, who have complained for years that Dodd-Frank was hurting the economic recovery by making it harder to get bank loans. Democratic senators, however, pressed Powell to say whether he would cut key consumer protections in the 2010 law, a measure that Trump often attacked on the campaign trail as a disaster. Powell stressed that he was “strongly committed” to the political independence of the Federal Reserve. He said he has not had any conversation with anyone in the administration that concerned him. During two hours of testimony, Powell sought to convey a sense of stability and praised his predecessors Janet Yellen and Ben Bernanke. He said that the Fed would continue on a gradual path of raising interest rates and shrinking the Fed’s massive $4.5 trillion balance sheet, which grew five-fold in the wake of the Great Recession as the Fed bought government bonds to push long-term interest rates lower. Powell said he expected the balance sheet to shrink to around $2.5 trillion to $3 trillion over the next three to four years under a program set in motion by Yellen. On interest rates, Powell said, “I think the case for raising interest rates at our next meeting is coming together.” When pressed for specifics on a December rate hike, Powell deferred, citing Fed policy not to talk about possible outcomes before officials gathered and heard all views. Trump tapped Powell on Nov. 2 to succeed Yellen, the first woman to head the nation’s central bank and the first Fed leader in four decades not to be offered a second term as chair. Yellen’s term ends on Feb. 3. She said last week she will leave the Fed once Powell is confirmed by the Senate. Private economists said there were no surprises in Powell’s testimony. He sought to bolster the reputation he built in his five years as a Fed board member as a centrist in pursuit of the Fed’s dual goals of promoting maximum employment and stable prices. “I have had the great privilege of serving under Chairman Bernanke and Chair Yellen and, like them, I will do everything in my power to achieve those goals while preserving the Federal Reserve’s independent and nonpartisan status that is so vital to their pursuit,” he said. Michael Pearce, U.S. economist at Capital Economics, said Powell gave “away little new on either the economic or policy outlook.” There was little market reaction to Powell’s testimony, although some big bank stocks did move up, as investors cheered his comments that some bank regulations could be loosened. The Yellen Fed has raised rates four times starting in December 2015, including two rate hikes this year. Economists expect a third rate hike to occur next month, and they’re projecting at least three additional rate increases in 2018. On other topics: • Powell dodged a number of questions posed by Democrats about whether it would be a wise move for Congress to boost budget deficits by $1.5 trillion over the next decade by passing tax cuts being pushed by Republicans and the Trump administration. Powell said the Fed would assess the impact of any tax cuts on the economy once the final package had won congressional approval. • He predicted that the economy would grow by 2.5 percent this year and around that level next year, considerably better than last year’s performance. • Powell said there was still slack in the labor market and that the Fed could allow unemployment, already at 4.1 percent — the lowest level in nearly 17 years — to fall below 4 percent.

Fed perplexed by chronically low inflation

CLEVELAND (AP) — Federal Reserve Chair Janet Yellen acknowledged Sept. 26 that the Fed is puzzled by the persistence of unusually low inflation and that it might have to adjust the timing of its interest rate policies accordingly. Speaking to a conference of economists, Yellen touched upon key questions the Fed is confronting as it tries to determine why inflation has remained chronically below its target of 2 percent annually. The Fed chair said officials still expect the forces keeping inflation low to fade eventually. But she conceded that the Fed may need to adjust its assumptions. In noting the persistence of low inflation, Yellen suggested that the Fed will take care not to raise rates too quickly. But she also said the central bank should avoid raising rates too slowly. Moving too gradually, she suggested, might eventually force the Fed to have to accelerate rate hikes and thereby elevate the risk of a recession. Most analysts expect the central bank to raise rates in December, for a third time this year, in a reflection of economic improvement. But the Fed has said its rate hikes will depend on incoming data. In her speech in Cleveland to the annual conference of the National Association for Business Economics, Yellen went further than she has before in suggesting that the Fed could be mistaken in the assumptions it is making about inflation. “My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective or even the fundamental forces driving inflation,” Yellen said. The Fed seeks to control interest rates to promote maximum employment and stable prices, which it defines as annual price increases of 2 percent. While the Fed has met its goal on employment, with the jobless rate at 4.4 percent, near a 16-year low, it has continued to miss its inflation target. Chronically low inflation can depress economic growth because consumers typically delay purchases when they think prices will stay the same or even decline. Inflation, which was nearing the 2 percent goal at the start of the year, has since then fallen further behind and is now rising at an annual rate of just 1.4 percent. Yellen has previously attributed the miss on inflation this year to temporary factors, including a price war among mobile phone companies. She and other Fed officials have predicted inflation would soon begin rising toward the Fed’s target, helped by tight labor markets that will drive up wage gains. In her remarks Sept. 26, Yellen said this outcome of a rebound in inflation is still likely. But she said the central bank needed to remain alert to the possibility that other forces not clearly understood might continue to keep inflation lower than the Fed’s 2 percent goal. The Fed chair cautioned that if the central bank moved too slowly in raising rates, it could inadvertently allow the economy to become overheated and thus have to raise rates so quickly in the future that it could push the country into a recession. “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” Yellen said. During a question-and-answer session, Yellen said the Fed would be “looking at inflation very carefully” to determine the timing of upcoming rate hikes. But she said the data is likely to be difficult to assess, in part because of the effects of the recent devastating hurricanes, which have forced up gasoline prices. Yellen’s remarks came a week after Fed officials left their benchmark rate unchanged but announced that they would start gradually shrinking their huge portfolio of Treasury and mortgage bonds. Those holdings had grown from purchases the Fed made over the past nine years to try to lower long-term borrowing rates and help the U.S. economy recover from the worst downturn since the 1930s. The Fed did retain a forecast showing that officials expect to boost rates three times this year. So far, they have increased their benchmark lending rate twice, in March and June, leaving it at a still-low range of 1 percent to 1.25 percent. Last week, the Fed said the reductions in its bond holdings would begin in October by initially allowing a modest $10 billion in maturing bonds to roll off the $4.5 trillion balance sheet each month. Asked about how long-term loan rates might respond to reductions in the Fed’s bond portfolio, Yellen cited a study that estimated that the increase in its bond holdings had lowered such rates by about 1 percentage point. But she said the reduction in the holdings wouldn’t likely raise rates by as much as a percentage point given that the Fed intended to keep the size of its balance sheet significantly higher than it was before the financial crisis. She said any upward pressure on rates would likely be gradual and take place over several years. Later, Yellen toured a job training center operated by Cuyahoga Community College and participated in a roundtable with students, faculty and potential employers. Yellen, who has visited a number of job centers during her time as Fed chair, told the group that job training was especially important now as employers find it harder in a tight labor market to find workers with the necessary skills.

Fed official: Bond portfolio could shrink soon

NEW YORK (AP) — A top Federal Reserve official suggested Aug. 14 that the Fed will likely announce next month that it will begin paring its bond portfolio — a step that could lead to slightly higher rates on mortgages and other loans. In an interview with The Associated Press, William Dudley, president of the Federal Reserve Bank of New York, said he thinks the Fed has adequately prepared investors for a reduction in the portfolio, which swelled after the 2008 financial crisis as the Fed bought bonds to reduce long-term rates. With the economy now much healthier, the Fed is ready to begin trimming its bond holdings. Dudley also said that he would favor a third increase this year in the Fed’s benchmark short-term rate if the economy remained strong. Many investors expect a modest rate hike in December, to follow the Fed’s previous increases in March and June this year. Speaking of the Fed’s likely September announcement that it will begin shrinking its $4.5 trillion bond portfolio, Dudley expressed confidence that investors would react calmly to the prospect of modestly higher rates on some consumer and business loans. He noted that the Fed spelled out to investors months ago the system it plans to use to reduce the portfolio gradually. “The plan is out there,” he said during an interview at the New York Fed. “It’s been generally well-received and fully anticipated. People expect it to take place.” As president of the Fed’s New York regional bank, Dudley is an influential voice on interest-rate policy. He is vice chairman of the central bank’s policy panel that sets interest rates and is a longtime close ally of Fed Chair Janet Yellen. His interview with the AP comes at a time when the Fed has essentially met one of its two mandates: To maximize employment. The unemployment rate is at a 16-year low of 4.3 percent, and job growth remains consistently solid. Yet the Fed has so far failed to meet its second objective of keeping prices stable. Inflation has stayed chronically below the Fed’s 2 percent target rate — a problem because consumers often delay purchases when they think prices will stay the same or even decline. In its latest reading, the Fed’s preferred inflation gauge was just 1.4 percent year-over-year. Dudley said Aug. 14 that he still thinks inflation will rise toward the Fed’s target level as the job market strengthens further and sluggish wage growth begins to pick up. On other topics, Dudley: • Suggested that Gary Cohn, who leads President Donald Trump’s National Economic Council and is close to Trump, would be a “reasonable candidate” to succeed Yellen as Fed chair if Trump chooses not to re-nominate Yellen when her term ends early next year. Dudley, who worked with Cohn as top officials at Goldman Sachs, said Cohn “knows a lot about financial markets,” and “I don’t think you have to have a Ph.D. in economics” to lead the Fed. In a recent interview, Trump said he was considering both Yellen and Cohn for the top Fed job, along with some other candidates he would not name. • Expressed confidence that the Fed’s political independence, long considered essential for it to carry out its functions, would remain respected during a Trump presidency. Trump may have the opportunity to install up to five members of the Fed’s seven-member board over the next year, and the president has shown a tendency to expect loyalty from some people he has named to key positions. Trump had offered a harsh judgment of the Fed and of Yellen during the presidential campaign but has since avoided making critical comments. Dudley noted that the Trump administration has so far been “very hands-off” toward the Fed, “very respectful of the monetary policy.” • Said that even as stock prices set record highs and other assets surge as well, he isn’t concerned that any potentially devastating asset bubbles might be forming, akin to the subprime mortgage bubble that triggered the 2008 crisis. Dudley said asset prices “are pretty consistent with what we are seeing in terms of the actual performance of the economy,” which he said has been evolving without much volatility. • Acknowledged that policymakers need to be “somewhat humble” about how the forthcoming reduction in the Fed’s bond portfolio might affect financial markets and loan rates. Dudley noted that the Fed has never before had to pare a balance sheet that has grown five-fold to $4.5 trillion. But he said officials have learned from the 2013 “taper tantrum” that rocked markets after a surprise announcement from the Fed, and has sought to telegraph all its actions well in advance. The Fed’s announcement that it will start paring its bond portfolio is expected to come after its next policy meeting ends Sept. 20. The meeting after that, in December, is when many Fed watchers expect the next increase in its key short-term rate, which remains in a still-low range of 1 percent to 1.25 percent. Yellen and other Fed officials have attributed the persistently low inflation rate, which slowed further in recent months, to such transitory events as a sharp drop in cellphone fees. Dudley said that if the economy evolves during the rest of 2017 as he expects, with inflation rebounding, “I would be in favor of doing another rate hike later this year.”

Rates unchanged, but signals hikes ahead

WASHINGTON (AP) — The Federal Reserve has left interest rates unchanged while signaling that it expects a resilient U.S. economy and solid job market to justify further rate hikes later this year. A statement the Fed issued May 3 after its latest policy meeting noted that the economy slowed sharply during the January-March quarter but that it expects that slump to be “transitory.” The Fed’s pause in raising rates comes after it modestly lifted its benchmark short-term rate in December and March. Most economists expect it to do so again when it next meets in mid-June. Nearly eight years after the Great Recession ended, the unemployment rate is a low 4.5 percent. Key gauges of the economy — from home sales to consumer confidence to the stock market — appear robust. Still, consumer spending and factory output have slowed, and inflation remains below the Fed’s target rate. The Fed is 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 April 28, the government estimated that the economy, as gauged by the gross domestic product, grew at a tepid 0.7 percent annual rate last 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 remain sluggish. On May 1, 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, fueled by job growth, higher consumer confidence and stock-market records. Many think that annualized growth could accelerate to around 3 percent and that the Fed will soon feel confident to resume raising rates. The global economic picture has also brightened somewhat. It isn’t just the Fed’s short-term rate — a benchmark for other borrowing costs throughout the economy — that likely occupied attention at this week’s meeting. Officials probably also discussed how and when to start paring their extraordinary large $4.5 trillion portfolio of Treasurys and mortgage bonds. The Fed amassed its portfolio — commonly called its balance sheet — in the years after the financial crisis erupted in 2008, when it bought long-term bonds to help keep mortgage and other borrowing rates low and support a frail economy. At the time, the Fed had already cut its short-term rate to a record low. The balance sheet is now about five times its size before the financial crisis hit. The Fed stopped buying new bonds in 2014 but has kept its balance sheet high by reinvesting the proceeds of maturing bonds. The Fed’s thinking has been that reducing the balance sheet could send long-term rates up and work against its goals of fortifying the economy. Now, as the Fed becomes more watchful about inflation pressures, the time is nearing when it will need to shrink its balance sheet, a process that could have the effect of raising some borrowing rates, at least modestly. The Fed jolted investors when it released the minutes of its March meeting, which showed that most officials thought that process would be appropriate later this year. This was sooner than many investors expected. The Fed didn’t clarify its timetable for paring its balance sheet in the statement it issued May 3. The statement said, as it has before, that the Fed doesn’t expect to begin reducing its bond holdings until its rate increases are under way. One reason the Fed didn’t say more about its expectations for its balance sheet might have been that this week’s meeting wasn’t accompanied by a news conference with Chair Janet Yellen to explain any shifts in the Fed’s policy or thinking. Yellen will hold a news conference after the Fed’s next meeting ends June 14. Some Fed officials have suggested that they would prefer not to be raising the short-term rate at the same time that they are beginning to reduce their balance sheet. Giving investors too much to digest at once risks unsettling financial markets. In 2013, the Fed triggered a brief storm in bond markets when then-Chairman Ben Bernanke raised the possibility that the Fed would start tapering its bond purchases later that year, catching investors by surprise. It’s also possible that the Fed chose not to reveal anything May 3 about its timetable for reducing its balance sheet, in part because the policy committee has yet to reach a consensus on when or how to do so.

Fed keeps key rate unchanged but hints of hike

WASHINGTON (AP) — The Federal Reserve is keeping its key interest rate unchanged but signaling that it will likely raise rates before year's end. The Fed said in a statement ending its latest policy meeting Sept. 21 that the U.S. job market has continued to strengthen and economic activity has picked up. But it noted that business investment remains soft and inflation too low and that it wants to see further improvement in the job market. The central bank characterized the near-term risks to its economic outlook as "roughly balanced." It was the first time it has used that wording since late last year, when it most recently raised rates. Most analysts have said they think the Fed will next raise rates in December. In its statement, the Fed said its policy committee concluded that "the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives." For the first time in nearly two years and for the first time since Janet Yellen became Fed chair in February 2015, there were three dissents to the Fed's statement. The three officials are all presidents of regional Fed banks — Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston. All wanted the Fed to raise its key rate at this meeting. The Fed's next meeting is just a week before the November elections, and most analysts think it wouldn't want to raise rates so close to when voters go to the polls. That's why the last meeting of the year in December is seen as the most likely time for the next rate hike as long as the economy keeps improving in line with the Fed's expectations. On Sept. 21, the Fed also issued updated economic forecasts, which reduced its expectation for rate increases this year to one from two. The Fed now expects two rate increases in 2017 and two in 2018, down from three each year in previous forecasts. And it lowered its expectation for the long-range level of its key policy rate to 2.9 percent, down from 3 percent in June and 3.5 percent before then. Until recently, many Fed watchers had thought that a rate hike was likely this week. They believed that the Fed, starting with a late-August speech by Yellen in Jackson Hole, Wyo., was preparing investors for an imminent increase. Yellen suggested then that given the job market's solid gains and the Fed's outlook for the economy and inflation, "the case for an increase in the federal funds rate has strengthened in recent months." Other Fed officials, including Vice Chairman Stanley Fischer, made similar observations, seemingly part of a collective signal that a September rate hike was probable if not definite. Sentiment shifted, though, after Lael Brainard, a Fed board member and Yellen ally, laid out the case for delaying a resumption of rate increases for now. Brainard's comments, coupled with a string of weaker-than-expected economic data, led watchers to conclude that there will likely be no rate increase this week. Still, many analysts had expected the statement the Fed released Sept. 21 to signal that modestly higher lending costs were coming soon — in part to satisfy the growing number of Fed officials who have pushed for a resumption of rate increases. Some economists had pointed to the minutes of the Fed's July meeting and comments from officials since then to suggest that the central bank's "hawks" — those who think it should be acting faster to raise rates — are gathering adherents from the dove camp. Doves tend to be wary of raising rates quickly for fear for undermining growth. Others said that members of the dove camp, who include Yellen, weren't yet convinced, especially after the recent string of tepid readings on the economy. Job growth slowed in August. A manufacturing gauge slid back into recession territory. An index that tracks the services economy, where most Americans work, fell to its lowest level since 2010. U.S. shoppers retreated in August to depress retail sales after four straight monthly gains. These were signs, too, that the economy might be struggling to accelerate after three straight quarters of anemic growth. And perhaps most critical for some Fed officials, inflation has yet to make significant progress in rising toward the central bank's 2 percent target range. The Fed's statement Sept. 21 was issued hours after the Bank of Japan, struggling to rejuvenate an ailing economy, set a more ambitious goal for raising inflation and announced steps meant to raise the profitability of financial firms. Analysts expressed doubt, though, that the Bank of Japan's new target would change the mindset of shoppers and businesses long used to a stagnant economy and flat or declining prices. They said they expected Japan's central bank to eventually slash its policy rate further. In Europe, Mario Draghi, head of the European Central Bank, is seeking help from the governments of the 19 counties that use the euro currency. The ECB this month left its aggressive stimulus measures unchanged and urged European governments to spend more on infrastructure and to enact reforms to make their economies more efficient and business-friendly. The eurozone economy is growing slowly, but inflation remains well far below the ECB's 2 percent annual target.

Federal Reserve keeps rates steady but sees less risk to US economy

WASHINGTON (AP) — The Federal Reserve kept interest rates unchanged July 27 but sounded a positive note: Near-term risks to the economy, the Fed said, have diminished. It noted that the U.S. job market has rebounded, with robust hiring in June after a deep slump in May. At the same time, the Fed said in a statement after its latest policy meeting that it plans to closely monitor global economic threats and financial developments to ensure that they don’t slow the economy. The Fed seemed to be referring in particular to Britain’s vote last month to leave the European Union — a move that poses risks to the rest of Europe and to the global economy. The central bank gave no hint of when it might resume the rate hikes it began in December, when it raised its benchmark rate from a record low. Some analysts who had doubted that the Fed would be ready to raise rates as soon as September said Wednesday’s statement appeared to revive that possibility. “The Fed is saying that near-term risks have diminished, so that certainly puts September back in play,” said Brian Bethune, an economics professor at Tufts University. Bethune said he still thought the Fed would wait until December before raising rates but that a September move was possible if hiring remains strong and the global economy and markets remain stable. Greg McBride, chief financial analyst at, noted that “the Fed gave a very upbeat assessment of the U.S. economy, which is the first step toward prepping markets for another rate hike.” Some also suggested that the Fed’s brighter outlook suggests that it’s become less concerned that a British exit from the EU — commonly dubbed “Brexit” — would seriously undermine the U.S. or global economy. The statement signals that the Fed “does not think that Brexit will be a significant hindrance for the U.S. economy,” said Carl Tannenbaum, chief economist at Northern Trust. Stock averages posted a modest increase after the statement was issued at 2 p.m. Eastern time, with investors seemingly encouraged by the Fed’s more positive assessment of the economy. The yield on the 10-year Treasury note dipped from 1.53 percent to 1.51 percent. The decision to leave its key rate unchanged in a range of 0.25 percent to 0.5 percent was approved on a 9-1 vote. Esther George, the president of the Fed’s Kansas City regional bank, dissented for the third time this year, arguing for an immediate quarter-point rate hike. A few months ago, it was widely assumed that the Fed would have resumed raising rates by now. But that was before the U.S. government issued the bleak May jobs report and Britain’s vote last month to quit the EU triggered a brief investor panic. Since then, though, a resurgent U.S. economy, the bounce-back in hiring and record highs for stocks have led many economists to predict a Fed move by December if not sooner. In June, employers added 287,000 jobs, the most since October 2015. In December, when the Fed raised its benchmark rate from a record low near zero, it also laid out a timetable for up to four additional rate hikes this year. But intensified fears about China’s economy and a plunge in oil prices sent markets sinking and led the Fed to delay further action. Once the markets stabilized, the Fed signaled a likely rate increase by midyear. Anemic hiring in April and May, though, raised concerns, and it left rates alone. The central bank was also affected by Britain’s forthcoming vote on whether to leave the EU, anticipation of which had rattled investors. Now, though, the pendulum has swung back, especially after the arrival of a reassuring June jobs report. The Standard & Poor’s 500 stock index had plunged 5.3 percent in the two trading days after Britain’s vote. It has since regained all those losses — and set new highs. The economy is also picking up after the year’s anemic start. Stronger consumer spending is thought to have lifted growth, as measured by the gross domestic product from the January-March quarter to the April-June quarter, with further acceleration expected later this year. In the spring, consumers boosted spending at the fastest pace in a decade. Economists also foresee a lift from business investment, reflecting a rebound from cutbacks in the energy sector. All that strength might argue for September rate hike, especially if monthly job growth equals as least 200,000 between now and then. Still, the risks of raising rates again too soon and possibly choking off economic activity may seem greater to the Fed than the risks of waiting longer. It has room to accelerate its rate increases if the economy were to heat up so much as to ignite high inflation.  

Fed keeps key rate unchanged; no hint on timing of next hike

WASHINGTON (AP) — The Federal Reserve kept a key interest rate unchanged Wednesday against the backdrop of a slowdown in U.S. and global growth and provided no hint of when its next rate hike may occur. In a statement after its latest policy meeting, the Fed noted that the United States is enjoying solid job gains but also that "economic activity appears to have slowed." The Fed said that such key areas as consumer spending, business investment and exports have weakened. At the same time, it expressed less alarm about global economic conditions than it had after its previous meeting in March. In March, the Fed had cautioned that global developments "pose risks." In Wednesday's statement, it no longer mentioned such risks, though it said it would "closely monitor" global economic and financial developments. The Fed repeated that it expects inflation to move toward its 2 percent target from persistently low levels as temporary factors, like sharply lower energy prices, fade. "The softness in U.S. economic data to start 2016 gave the Fed plenty of cover to hold off on further rate hikes now, and they held their cards close to the vest regarding upcoming meetings," said Greg McBride, chief financial analyst at Investor reaction to the Fed's announcement, which was in line with expectations, was muted. Bond prices rose slightly, sending yields moderately lower. Stock indexes were mixed and traded about where they were before the Fed released its latest policy statement at 2 p.m. Eastern time. The Fed's decision was approved on a 9-1 vote, with Esther George, head of the Fed's regional bank in Kansas City, dissenting for a second straight meeting. As in March, George argued for an immediate rate hike. The Fed didn't rule out a rate hike at its next meeting in June. But neither did it say anything to prepare investors for such action. In October, the Fed had said in a post-meeting statement that it would decide whether it would be "appropriate" to raise rates at its subsequent meeting in December, at which point it did increase rates from record lows. Economists have suggested that the Fed will likely again insert such language into the statement that will precede its next rate hike to prepare investors and ensure an orderly market response. Still, Paul Ashworth, chief U.S. economist at Capital Economics, said that while the Fed didn't signal a rate hike in June, its lessened concern about global risks suggests it's still leaving the door open for a June hike. "Whether the Fed follows through will depend on what happens in financial markets over the next six weeks," Ashworth said. The Fed took note of a slowdown in U.S. growth during the first quarter of the year. Its statement said consumer spending has moderated even though incomes have been growing solidly. The statement also observed that business investment spending and exports have weakened. Business investment has been hurt by the plunge in oil prices, which has triggered spending cuts at energy companies. And exporters have struggled with a strong dollar, which has made American goods costlier overseas. In December, when the Fed raised its benchmark rate, it signaled that it expected four more rate hikes in 2016. In March, it revised that expectation to just two hikes. And some economists say it might not raise rates again before the second half of the year. A slowdown in China, the world's second-largest economy after the United States — has already hurt the developing world. Europe is straining to gain momentum, and Japan is hobbled by wary consumers and an aging population. On Thursday, the government is expected to estimate that the U.S. economy grew at a tepid annual rate under 1 percent in the January-March quarter. Some forecasters think growth might have been as weak as 0.3 percent, which would mean the economy nearly stalled out last quarter. What's more, U.S. inflation is running well below the Fed's optimal level of 2 percent. In the meantime, far from considering rate hikes, other major central banks are weighing steps to further ease credit, increase inflation and bolster growth. On Thursday, for example, when the Bank of Japan meets, a key topic will be what else it might do to fight economic weakness, raise inflation and blunt a rise in the yen's value against the dollar, which hurts Japan's exporters. In January, in a desperate bid to raise inflation, Japan's central bank introduced negative rates. Yet inflation and growth remain stuck near zero. Last week, Mario Draghi, head of the European Central Bank, made clear he was ready to launch more stimulus efforts if needed to energize the eurozone economy. That pledge came after the ECB had already expanded its stimulus programs in March. China's sliding economy has stabilized after worries about its growth had rocked financial markets in January. But now, a new challenge has raised international concerns: A June 23 referendum in which Britain will decide whether to leave the European Union. World leaders have warned that a British exit from the EU could threaten the global economy. Because that vote will occur just a week after the Fed's June 14-15 meeting, some analysts have suggested that the U.S. central bank would avoid any rate hike in June for fear it could rattle markets ahead of the British vote.  

As oil falls, US consumer prices down 0.1 percent in December

WASHINGTON (AP) — U.S. consumer prices fell in December and rose by the smallest amount in seven years in 2015, reflecting the toll of slumping energy costs. Consumer prices slipped 0.1 percent last month after a flat reading in November, the Labor Department reported Jan. 20. For the entire year, overall inflation was up just 0.7 percent, even smaller than a 0.8 percent rise in 2014. Both years were heavily influenced by plunging energy prices. It was the weakest annual increase since a 0.1 percent rise in 2008. Core inflation, which excludes volatile energy and food costs, edged up 0.1 percent in December. That was the smallest monthly gain since August. For the full year, core inflation was up 2.1 percent after a 1.6 percent rise in 2014. Energy prices and a stronger dollar have been major factors holding down inflation. The Federal Reserve, however, last month boosted a key interest rate for the first time in nine years, saying it believed inflation would eventually strengthen. The quarter-point increase pushed the federal funds rate from near zero to a range of 0.25 percent to 0.5 percent. Fed officials have stressed that the pace of future rate increases will be heavily dependent on signs that inflation is beginning to accelerate closer to the Fed’s target of 2 percent annual price gains. But since the Fed met last month, oil prices have declined further. That suggests it might take even longer for the Fed to hit its target. For December, energy prices fell 2.4 percent and are down 14.9 percent for the year. Food costs declined 0.2 percent and are up a modest 0.8 percent for the year. The nationwide average for a gallon of gasoline is down to $1.88, 12 cents lower than a month ago. But some analysts see the uptick in core inflation as a sign that inflation outside of energy and food is beginning to accelerate. The 2.1 percent rise in the core for the 12 months ending in December followed a 12-month rise of 2 percent in November. It was the largest 12-month gain in core prices since a similar 2.1 percent increase in July 2012. Driving core inflation in December were increases for shelter costs, medical care, home furnishings and education. Meanwhile, prices for clothing, airline fares and new cars declined in December. Laura Rosner, an economist with BNP Paribas, said that she is forecasting overall inflation will rise by 1.4 percent in 2016. The potential for further declines in energy and food costs, however, may pull her projection lower. The Fed next meets on Jan. 26-27, and private economists widely believe that the Fed will leave rates unchanged. Some economists say it could be June before the Fed raises rates again.  


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