The Federal Reserve on Wednesday did exactly what the financial markets were expecting: nothing. It left interest rates unchanged, maintaining the Fed Funds rate — the rate that banks charge each other for overnight loans — at 0.25 percent to 0.50 percent.
Fed policymakers also lowered expectations for growth this year to 2 percent, from 2.2 percent previously, and reduced the lower end of its range for longer run outlook to 1.6 percent to 2.4 percent from 1.8 percent to 2.4 percent.
Given the more dovish outlook, it's not surprising that six of the 17-member Fed's policy making Federal Open Market Committee now expect just one rate hike this year instead of two. Only one member held that forecast after the Fed's last policy meeting, and Fed expectations for 2017 and for 2018 now call for three rate increases each year, down from four. The also lowered its long-run outlook for Fed Funds to 3 percent from 3.3 percent
In her press conference following the release of the Fed's statement, Fed Chairwomen Janet Yellen "highlighted how the payrolls data slowed 'markedly' in April and May … and the data merit close watching," said Jim O'Sullivan, chief U.S. economist for HFE. "She is making the case for being very cautious with any policy changes."
Financial markets had little reaction. The Dow Jones Industrial average initially gained about 10 points to 17,745 within minutes of the release of the Fed statement, then retreated slightly. The yield on the 10-year Treasury note initially didn't budge, then fell slightly before inching up to 1.59 percent.
"The statement seemed very cautious," said Anthony Valeri, Fixed Income and Investment Strategist for LPL Financial. "It seemed to have some concern about the pace of labor market improvement and about inflation running below target."
Indeed, the statement began, noting that "the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished."
That was clearly the case in May when payrolls rose by just 38,000 (73,000 if adjustments were made for striking Verizon workers), well below expectations.
