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Fed more upbeat on economy, unclear on timing of rate hike

The Federal Reserve offered a slightly more upbeat assessment of the economy but provided little insight into when it will raise its benchmark interest rate for the first time in nearly a decade.

Fed officials voted unanimously to keep the target rate at zero for now, after wrapping up their regular two-day policy-setting meeting in Washington on Wednesday afternoon. In a carefully worded statement, the central bank noted that the economy has expanded “moderately.” It pointed to solid job gains and lower unemployment as signs that the labor market has improved, adding that underemployment has also diminished.

Perhaps most important, the Fed characterized the risks to its outlook for the economy as “nearly balanced” — the same description it used after its previous meeting. Some analysts believe that the Fed will move once the risks are weighted more evenly.

U.S. stock markets spiked after the release of the Fed statement but quickly settled back down. Both the blue-chip Dow Jones Industrial Average and the broader Standard & Poor's 500 average were up about half a percentage point in mid-afternoon trading.

Fed Chair Janet Yellen has said several times that she expects the central bank will raise its benchmark federal funds rate before the end of the year, a move that would herald the end of the central bank’s unconventional — and controversial — efforts to resuscitate the American economy.

Many investors and economists believe the moment will come during the Fed’s meeting in September, which would be followed by a news conference allowing Yellen to explain the central bank’s decision more fully. But a vocal minority think the Fed will wait to move in December, the next meeting with a scheduled news conference. A few economists — including two officials within the central bank — believe the Fed should hold off until 2016 to be sure the recovery is solid.

Fed officials have debated how strong of a signal to send as the moment of liftoff nears. But the central bank has repeatedly emphasized that its decision will depend on the evolution of economic data — and so investors should look to the numbers for the green light for action.

A key figure will be the government’s estimate of second quarter economic growth slated for release Thursday. Falling oil prices, a strong dollar and a sharp slowdown in the growth of consumer spending helped drive an unexpected contraction in the economy over the winter. Fed officials are hoping that second quarter GDP growth will prove the dip was merely temporary.

A stronger reading would also align with the pickup in hiring over the past two months. Unemployment is nearing its lowest sustainable level, making some officials antsy for the Fed to start tapping the brakes on the economy.

But others have argued that exceptionally low inflation means the Fed has plenty of time to act. Price growth remains well below the central bank’s 2 percent target, and officials have said they want to be “reasonably confident” it is moving up before tightening policy. In June, the central bank had stated that energy prices “appear to have stabilized.” But on Wednesday, it cited further declines in energy prices, along with the falling price of imports, as reasons inflation has remained low.

The Fed slashed its target interest rate to zero when the country was in the grips of the financial crisis in 2008, and it has stayed there ever since. In addition, it pumped trillions of dollars into the economy in an effort to lower longer-term rates and spur borrowing among consumers and investment among businesses. Unwinding those policies will likely take years.

Meanwhile, the Fed is facing renewed scrutiny in Congress. The House Financial Services committee on Wednesday passed a bill that would require the central bank to explain when it deviates from certain monetary policy models, disclose more information on salaries and allow for audits of the Fed's decision-making process. Another bill sponsored by Texas Republican Rep. Kevin Brady would create a commission to examine the Fed, which recently celebrated its centennial.

“The Fed is trying to do too much,” Brady said in an interview. “It can be the right tool, but not for everything and everybody.”

The central bank is also facing pressure from the other end of the political spectrum. A coalition of community activists and labor groups is urging the Fed to leave its target rate unchanged amid elevated unemployment rates among minorities.

“Until we reach genuine full employment, there is no reason for the Fed to contemplate putting people out of work and slowing down our economy via interest rate hikes,” the Fed Up campaign said in a statement.

Source: The Washington Post