Fed upbeat on U.S. economy, cites strong job gains

Wed Jan 28, 2015 5:49pm EST
 
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By Michael Flaherty and Howard Schneider

WASHINGTON (Reuters) - The Federal Reserve on Wednesday said the U.S. economy was expanding "at a solid pace" with strong job gains in a signal that the central bank remains on track with its plans to raise interest rates this year.

The Fed repeated it would be "patient" in deciding when to raise benchmark borrowing costs from zero, though it also acknowledged a decline in certain inflation measures.

After a two-day meeting of the Federal Open Market Committee, policymakers struck an upbeat tone on the U.S. economy's prospects and held to their view that energy-led weakness in inflation would dissipate.

"The committee, in fact, was downright bullish on current economic conditions and the outlook," said Paul Edelstein, director of financial economics at IHS Global Insight.

In making its announcement, the Fed largely skirted slumping economies in Europe and Asia, saying only that it would take "financial and international developments" into account when determining when to raise rates, adding a reference to global markets for the first time since January 2013.

"Economic activity has been expanding at a solid pace," the Fed said in a statement that marked an upgrade to its prior assessment of a "moderate pace" of growth. "Labor market conditions have improved further, with strong job gains and a lower unemployment rate."

Long-term U.S. bond yields fell as some investors focused on the Fed's reference to international developments and weak inflation, potentially widening the gap between the central bank's language and what markets expect policymakers to do. The dollar strengthened against a broad basket of currencies.

"Just the inclusion of international development, that's probably perceived as dovish and the bond market is rallying probably on that," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics. O'Sullivan added that "at the end of the day, the baseline is still June for lift-off," and said that the falling unemployment rate remains a key gauge for the Fed.   Continued...

 
U.S. Federal Reserve Chair Janet Yellen holds a news conference at the Federal Reserve in Washington December 17, 2014. REUTERS/Kevin Lamarque