Fed Upbeat Despite Economic Challenges

The Federal Reserve said in January it was “closely monitoring” global economic and financial developments but maintained an otherwise upbeat view of the U.S. economy. The statement acknowledged that the U.S. economy has slowed and said little about when the Fed would raise interest rates again.

The U.S. central bank suggested in December it may increase its benchmark interest rate four times this year. Turmoil on Wall Street, however, has led to doubts.

In its statement, the Fed emphasized the resilience of the job market despite the weakened recovery and pointed out strength in housing and consumer
spending.

Yet broader economic growth has again disappointed. The Fed cited weak exports and inventory investment among the culprits.

Low oil and commodity prices have pushed down inflation. And, the central bank alluded to the volatility in financial markets.

The gradual (presumably quarterly) interest rates to which the Fed has alluded seem less likely, investors say.

At issue is whether Fed officials believe turbulence in the markets reflects underlying weakness in the U.S. economy.

“I think the Fed is on hold right now and hasn't made up its mind yet if the global market volatility and economic developments in China will herald a dramatic shift in the U.S. economic or inflation outlook,” said Scott Anderson, chief economist at Bank of the West.

The Fed must also confront a stubborn shortfall in one of its central objectives: maintaining inflation of about 2%.

Earlier this month, the Fed said it anticipates that inflation will remain low in the short term, weighed down by falling oil and commodity prices.

Source: The Washington Post S