U.S. Federal Reserve voices concern about global economic pressures

WASHINGTON -- The Federal Reserve sounded a note of concern Wednesday about how global pressures could affect the U.S. economy, while keeping a key interest rate unchanged.

See Full Article

Six weeks after it raised rates from record lows, the Fed took stock of a more perilous international picture that could alter its plans for further raising rates. The changes in a statement it issued after its latest policy meeting signalled that the Fed could be prepared to slow future rate hikes if financial market losses and global weakness do not abate.

The statement said the Fed was studying "global economic and financial developments and is assessing their implications for the labour market and inflation."

Since the Fed raised rates Dec. 16, stock markets have plunged, oil prices have skidded and China's leaders have struggled to manage a slowdown in the world's second-biggest economy.

The Fed's statement Wednesday noted that U.S. economic growth has also slowed. Some economists say they now expect just two slight Fed rate increases during 2016.

Reaction to the Fed's latest policy statement was muted on financial markets. Bonds and the U.S. dollar were little changed, and stock indexes gave up a slight gain and were modestly lower.

The policymakers left their benchmark rate unchanged in a range of 0.25 per cent to 0.5 per cent. For seven years until December, they had kept that rate at record lows near zero.

"It was very noncommittal," Asha Bangalore, economist at Northern Trust, said of the Fed's statement. "Their aim was not to introduce new stresses into the marketplace."

The statement did nothing to change Northern Trust's forecast that the Fed will raise rates twice this year -- in June and December.

Still, the changes the Fed made in describing current economic conditions signalled that it may be prepared to put its credit tightening on hold until it sees greater signs that the markets and the economy are stabilizing.

The December statement had said the economy was expanding at a "moderate pace." The new statement notes that "economic growth slowed late last year."

The previous statement also described risks to the outlook as "balanced." That description was dropped Wednesday. In its place, the Fed inserts its concern about global economic and financial developments.

The Fed's decision was approved by a unanimous vote of 10-0.

The most visible sign of the rising economic fear has been the sharp fall in the stock market. The Dow Jones industrial average shed more than 7 per cent of its value in the first three trading weeks of 2016.

China has unnerved investors because of an economic slowdown that Beijing seems incapable of steering properly. The country's decelerating growth has shrunk global commodity prices and the emerging market countries that have supplied them to China. Last week, the price of oil reached a 12-year low of $28.15 a barrel before rebounding slightly this week.

The tumbling markets so far haven't shaken consumer confidence. One measurement of confidence climbed for a second month, the Conference Board said this week. Much of the optimism stems from solid job growth: U.S. employers added an average of 284,000 jobs a month in the final quarter of last year. And the unemployment rate remains a low 5 per cent. Home and auto sales have also been solid.

But American manufacturing has remained weak. Export sales have slowed in part because a higher-valued dollar has made goods more expensive overseas. The strong dollar has also made imports cheaper, which, along with falling energy prices, has kept inflation below the Fed's target level for more than three years.

The economy's growth, as measured by the gross domestic product, has lagged, with many analysts suggesting that it slowed to a sluggish annual rate below 1 per cent in the October-December quarter. Still, they foresee a rebound to a rate of around 2 per cent in the current January-March quarter, helped by strength in consumer spending.

Many point to the Fed's December rate hike as a key factor in the stock market's tumble. The move amounted to only a small rise in the Fed's still-extremely low target rate for overnight bank lending. But it signalled that a seven-year period of near-zero rates was ending and that while borrowing costs wouldn't be rising fast, they would be headed steadily up.

The Fed's critics had warned for years that by keeping rates so low for so long, it was fueling dangerous bubbles in assets such as stocks. Some now see the falling stock prices as the correction that they had forecast would occur after the Fed started raising rates.

Others say the market's swoon is not the product of the small increase in the Fed's benchmark rate. They point instead to China's economic troubles, the slide in oil prices and weakness in key areas of the global economy. Still, some economists suggest that if the Fed could have foreseen what has ensued in the weeks since it raised rates, it might have reconsidered.



Advertisements

Latest Economic News

  • Asian markets mostly higher after Wall Street sinks

    Economic CTV News
    BEIJING -- Asian stock markets rose Tuesday after Wall Street sank on worries that the Trump administration might not do as much for businesses as once thought. KEEPING SCORE: Tokyo's Nikkei 225 gained 1 per cent to 19,174.56 and Hong Kong's Hang Seng advanced 0.5 per cent to 24,317.93. Source
  • American Airlines buys stake in China Southern Airlines

    Economic CTV News
    BEIJING -- American Airlines has agreed to pay US$200 million for a stake in China Southern Airlines, one of China's three major state-owned carriers, in a bid for a bigger share of the country's growing travel market. Source
  • Sask. city pays Domtar $5.1M over tax assessment dispute

    Economic CTV News
    PRINCE ALBERT, Sask. - City council in Prince Albert, Sask., has authorized a $5.1 settlement with Domtar in a tax dispute over the valuation of a pulp mill Domtar purchased from Weyerhaeuser in 2006. Domtar had argued the assessment of its property was too high for 2009 and 2010 and requested a refund. Source
  • Ontario promises housing affordability measures in the spring budget

    Economic CTV News
    TORONTO -- Ontario Finance Minister Charles Sousa confirmed Monday he plans to include housing affordability measures in his upcoming budget. Premier Kathleen Wynne has said her government is working on a "comprehensive set of plans," to deal with rising home prices in the Greater Toronto and Hamilton Area (GTHA), as well as rising rental rates. Source
  • Home Capital terminates CEO Martin Reid

    Economic CBC News
    Home Capital Group Inc. has terminated its president and CEO Martin K. Reid, effective immediately. Kevin P.D. Smith, chair of the board of directors, said in a statement Monday that the Toronto-based mortgage lender requires leadership that can bring a renewed operational discipline, emphasis on risk management and controls, and focus on improving performance. Source
  • B.C. First Nation gives nod to proposed LNG export facility

    Economic CTV News
    VANCOUVER -- A First Nation on Vancouver Island has approved a proposed liquefied natural gas export facility on its traditional territories. Leaders of the Huu-ay-aht First Nation and the CEO of Vancouver-based Steelhead LNG held a joint news conference in Vancouver on Monday to announce what Chief Robert Dennis said was the First Nation's "official entry into the international business world. Source
  • Officials gear up to assign infrastructure cash or lose control over its spending

    Economic CTV News
    OTTAWA - Provincial governments have been warned that they have until this time next year to start assigning billions in infrastructure cash to eligible projects, or else they could lose control over how it can be spent. Source
  • B.C. appeal court rules against Burnaby in bylaw battle with Trans Mountain

    Economic CTV News
    VANCOUVER -- A legal battle between the City of Burnaby and the Trans Mountain pipeline expansion has ended with the British Columbia Court of Appeal ruling the National Energy Board can override municipal bylaws. The fight began in 2014 when Trans Mountain was set to begin field studies on Burnaby Mountain, which required it to cut down trees, drill boreholes and operate heavy machinery -- activities that violate the city's bylaws. Source
  • Finance minister to tout Canada-U.S. trade to U.S. governors and mayors

    Economic CTV News
    CALGARY -- Canada's finance minister says he intends to head south of the border next week to reinforce the importance of Canada-U.S. trade. "Our approach was to be deeply engaged with the new administration from Day 1 . Source
  • Heroux-Devtek stocks drop after USAF rejects bid for new contract

    Economic CTV News
    LONGUEUIL, Que. - Heroux-Devtek Inc. shares hit a 52-week low Monday after the landing gear maker said its bid for a new contract with the U.S. military was rejected and work under an existing contract will be phased out within two years. Source