Fed says U.S. economy strong enough to handle rate hike

Wed Jun 17, 2015 5:35pm EDT
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By Howard Schneider and Jonathan Spicer

WASHINGTON (Reuters) - The U.S. economy is growing moderately after a winter swoon and likely strong enough to support an interest rate increase by the end of the year, but concerns remain over the recovery of the labor market, U.S. Federal Reserve officials said on Wednesday.

With the economy still on track to grow as much as 2 percent for the year, the central bank's latest policy statement keeps it on track for at least one and perhaps a second rate increase later this year.

Fed Chair Janet Yellen, however, emphasized that the rate decision was still up in the air and rested squarely on further improvement in the labor market - renewing her focus on a longstanding concern.

In a press conference following the end of the Fed's two-day policy meeting, Yellen said she wanted "more decisive evidence" that labor markets were healing, and that wages would increase beyond their current "subdued pace."

Even as the Fed appeared to be approaching a decision to proceed with a rate hike as soon as September, "some cyclical weakness in the labor market remains," Yellen said, pointing to the low labor force participation rate and the high level of part-time employment.

Her comments are likely to focus even more attention on upcoming U.S. employment and wage reports, as markets look for signs that continued economic growth is translating into more jobs and higher wages.

After a weak start to the year, highlighted by a first-quarter economic contraction, policymakers said gross domestic product is poised to grow between 1.8 percent and 2.0 percent in 2015, down from a March forecast of between 2.3 percent and 2.7 percent.

The Fed also said the unemployment rate is expected to be slightly higher at the end of the year - at 5.2 percent to 5.3 percent - than previously forecast despite the continued improvement in labor markets. The unemployment rate last month was 5.5 percent.   Continued...

Federal Reserve Chair Janet Yellen attends a news conference after chairing the second day of a two-day meeting of the Federal Open Market Committee to set interest rates in Washington June 17, 2015. REUTERS/Carlos Barria