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Category: Money and Monetary Policy / Economic Trends / Stockmarket / Markets

US Federal Reserve scales back its rate rise forecasts

Thursday, 17 Mar 2016 08:06:43 | Peter Ryan

Federal Reserve Board Chair Janet Yellen speaks at a quarterly news conference. (AFP: Alex Wong/Getty Images)

The US Federal Reserve has cautiously scaled back its forecasts on how high interest rates might go this year.

In holding the official overnight rate steady at between 0.25 and 0.5 per cent, the world's most powerful central bank signalled it was treading carefully as it confronts risks from an uncertain global economy.

Despite moderate economic growth in the United States, a falling jobless rate and inflation on track to hit the desired 2 per cent, the Fed revised its earlier messages by signalling rate rises this year would be more gradual than expected.

Forecasts now centre on two 0.25-percentage-point rate rises this year, rather than the four projected in December when the Fed raised rates for the first time in almost a decade.

Fed chair Janet Yellen was using cautious tones about the global outlook when she addressed reporters in Washington shortly after the decision was revealed.

"If economic developments unfold as we expect, further increases in the Fed funds rate will prove appropriate over time. Most participants anticipate that and that the pace will be gradual," Dr Yellen said.

"We do expect over time that neutral rate to move up but, you know, we aren't positive what the pace of that will be over time."

The revised rate outlook comes as the Federal Reserve navigates global market volatility.

Key hurdles include sluggish growth in Europe, lingering concerns about a hard economic landing in China and fallout in emerging markets from the Fed's December rate hike.

"There are risks and we're attentive to them," Dr Yellen told reporters.

The Fed's decision to leave rates steady and to downgrade forecasts comes as the Bank of Japan, the European Central Bank and central banks in Denmark, Sweden and Switzerland have taken interest rates into negative territory.

But Janet Yellen rejected suggestions that the US Federal Reserve might to forced to consider a similar strategy.

"This is not actively a subject that we are considering or discussing," Dr Yellen responded.

"The committee continues to feel that we are on a course where the economy is improving and inflation is moving back up.

"If events continue to unfold in that way we are likely to continue to gradually raise rates over time.

"Again that is not fixed in stone. We're prepared to respond if things transpire differently, but we are not spending time actively debating and considering things we could do for additional accommodation, and certainly not actively considering negative rates."

Financial markets welcomed the Fed's renewed caution and Wall Street's Dow Jones Industrial Average of blue chip stocks ended 0.4 per cent higher.

The Australian dollar surged to a high of 75.6 US cents after the Fed's decision as Australia remains a top destination for global cash in a world of near zero rates.

Follow Peter Ryan on Twitter @peter_f_ryan and on his Main Street blog.

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