U.S. Federal Reserve keeps benchmark interest rate steady

The U.S. central bank kept its benchmark interest rate steady in a range between 0.25 and half a per cent on Wednesday, but cut its forecast for how the U.S. economy will perform in the near term.

Fed still expects to hike rates this year — but maybe only twice

The Fed, led by chair Janet Yellen, did not change its benchmark lending rate on Wednesday. (Andrew Harrer/Bloomberg)

The U.S. central bank kept its benchmark interest rate steady in a range between 0.25 and half a per cent on Wednesday, but cut its forecast for how the U.S. economy will perform in the near term.

However, in deciding to keep rates where they are, the Fed did make some minor adjustments to its outlook.

"Economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months," the Fed said, a change from January when the central bank noted that economic activity was "slowing."

In December, the Fed decided to hike interest rates off their emergency lows, deeming at the time the economy was almost ready to stand on its own two feet. Since then, however, the stock market and other economic indicators have fallen sharply, casting doubt on the Fed's confidence.

Wednesday's decision suggests the Fed is still leaning toward more rate hikes in the future, but likely only two this year. In January, the so called "dot plot" of expectations in the Fed were to have as many as four rate hikes in calendar 2016, bringing the benchmark rate a full percentage point higher than where it is now.

"It's not a huge surprise," said Randy Frederick, a managing director with investment firm Charles Schwab. "Probably if there is any surprise it's the fact that they seemed to adjust their forecast to more in-line with what the market was already expecting."

The Federal Reserve now expects the U.S. economy to grow by 2.2 per cent this year, a slight downgrade from what it was forecasting in January, which was 2.4 per cent. For next year, the expectation is now two per cent growth, down from 2.1 per cent in January.

"The Fed cut its economic outlook citing both American and foreign concerns," Mark Grant at Southwest Securities said in a note to clients after the decision came out. "As the Fed [held the] rate steady I believe a lot of uncertainty has now left the markets."

Stocks respond positively

The Dow Jones and S&P 500 stock indexes reacted positively to the news, swinging from being slightly down to slightly up on the day once it became clear the central bank wasn't going to make lending incrementally more expensive.

The Canadian dollar reacted positively to the news with its best day of the year, up almost 1.4 cents to trade above 76 cents US for the first time in 2016. Oil was also up almost six per cent, which helped the loonie's rise.

Yellen told reporters the Fed is not currently considering a policy of negative interest rates, noting they have had mixed effects overseas.

She added that she's encouraged by a U.S. jobless rate that has fallen to an eight-year low under five per cent, but "I'm somewhat surprised we're not seeing more of a pickup in wage growth,"she added at the news conference.

About the Author

Pete Evans

Senior Writer, CBCNews.ca

Pete Evans is the senior business writer for CBCNews.ca. Prior to coming to the CBC, he had stints at Report on Business, the Financial Post, the Toronto Star, Canadian Business Magazine and elsewhere. Twitter: @p_evans Email: pete.evans@cbc.ca Secure PGP: https://secure.cbc.ca/public-key/Pete-Evans-pub.asc

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