Citing an uptick in jobless claims and a moderation in wage growth, the Federal Reserve on Friday held off raising interest rates and indicated that it expects fewer increases to come.
After a two-day meeting in Washington, the Fed’s policymaking board affirmed that interest rates are still on track to reach a neutral level, meaning that interest rates are neither stimulative nor accommodative.
The panel said that it continued to believe the “next move” in rates was “likely to be up” from the current range of 2 percent to 2.25 percent, but added that it “continues to closely monitor” financial developments.
The sign that the Fed may have backed away from an imminent rate increase after so many strong performances by financial markets in recent months gave the U.S. dollar a slight bump. On Thursday, the ISM reported that its purchasing-managers index had surged to a 17-year high and US shares closed at their highest since the end of 2007.
U.S. bond yields and stock prices reversed course after the data was released, and benchmark US Treasuries subsequently fell by 5 basis points, meaning that $5 in new U.S. debt would now be worth $4.25, a sign that the Fed has played it safe after a strong July employment report that had surprised many analysts who predicted only modest job growth.
The Fed indicated that it expects GDP growth to have slowed to an annualized 2.4 percent rate in the second quarter, down from the 2.9 percent rate in the first quarter. In its quarterly projections, however, the Fed reiterated its expectation that the rate of GDP growth will rise to 2.9 percent and increase to between 3.1 percent and 3.4 percent in the last three months of the year.
According to the Labor Department, the number of new weekly initial jobless claims, which reflect weekly applications for jobless benefits from the latest reporting period, increased to 240,000 last week, the highest level in six weeks.
On an average basis, initial jobless claims dropped to the low 240,000-range in April, in the midst of a strong job market that led to gains in wages and another steady decline in unemployment rates. On Friday, the Fed estimated that wages were growing at an annualized pace of about 2.7 percent. Inflationary pressures are expected to keep a ceiling on increases in average hourly earnings.
“The FOMC judges that a highly accommodative stance of monetary policy remains appropriate,” the Fed said in a statement. “With the unemployment rate approaching levels the Committee judges to be consistent with its dual mandate,” it said, referring to the central bank’s two mandates for maximum employment and price stability.