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Fed Holds Rates Steady, Notes Strongly Rising Business Investment

Motorcycclist participating in the The Rolling Thunder First Amendment Demonstration Run ride by the Federal Reserve Building in Washington, DC, on May 24, 2015. The Rolling Thunder First Amendment Demonstration Run is an annual event to pay tribute to current and former US military members. AFP PHOTO / CHRIS KLEPONIS …
CHRIS KLEPONIS/AFP/Getty Images

The Federal Reserve left its short-term interest rate target unchanged Wednesday while indicating that investments by U.S. businesses have picked up.

The Federal Reserve’s monetary policy-making committee concluded its two-day meeting by issuing a statement about its views of the economy. In its March statement, the Fed indicated business investment had “moderated” from a strong fourth quarter. On Wednesday, the Fed changed this language to note that business investment “has continued to grow strongly.”

This would appear to signal a policy victory for the Trump administration because the expansion of business investment was a key goal of the Trump administration’s tax cuts. Investment should increase the capital stock of the U.S. economy, improving productivity and driving up wages.

The Fed also indicated that inflation has firmed, coming closer to the Fed’s two percent target. The Fed has been predicting inflation would pick up for several months after it unexpectedly fell in the latter half of 2017.

Nothing in the Fed’s statement indicated that it views this with alarm or that the Fed plans to pick up the pace of interest rate increases. To the contrary, the Fed added “symmetric” when describing its target, which is likely a signal that the Fed would allow inflation to run higher than two percent just as it has allowed it to run below the target. In other words, two percent is not viewed as a ceiling for inflation.

“Inflation on a 12-month basis is expected to run near the committee’s symmetric 2% objective over the medium term,” the statement said.

The Fed also noted that household spending has continued to slow down from a very active fourth quarter of 2017.

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