WASHINGTON: The Federal Reserve opens its sixth monetary policy meeting this year on Tuesday again facing the quandary that the US economy is not clearly ready for an interest rate hike.
While some economists say the Fed, long anxious to pull away from its crisis-era ultralow rate policy, could surprise with an increase in the federal funds rate on Wednesday, most say it will stand pat.
With that benchmark, crucial to borrowing and deposit rates around the world, stuck at 0.25-0.50 percent, the Federal Open Market Committee (FOMC), which sets monetary policy, has repeatedly signaled intentions to increase it this year.
But some weak economic data in recent weeks raises a question mark over the strength of the US economy. And persistent weakness in other major economies also continues to challenge the rationale for a rate increase.
Jim O’Sullivan, chief US economist at High Frequency Economics, said he thinks December is the month for an increase.
“We expect Fed officials to couple an on-hold announcement this week with more pronounced ‘tightening is imminent’ guidance,” he said in a client note.
Just three weeks ago, comments made at the Fed’s annual central banking symposium in Jackson Hole, Wyoming, signaled that the FOMC could finally pull the rate trigger at the end of its September 20-21 meeting.
Most notably, Fed Chair and FOMC head Janet Yellen said clearly that she thought the time had come.
“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said.
Others, including Fed Deputy Chair Stanley Fischer, reinforced that impression.
But the data since then has not supported them. Job creation has been relatively good, and the housing market solid. But, extending the second-quarter’s slump, industrial output and consumer spending have stayed weak.
In addition, inflation — which the Fed has sought with its hefty stimulus policy to increase — remains feeble, not appearing to react to a world awash in easy money.
The last FOMC official to speak ahead of the meeting, Fed Governor Lael Brainard, held firm with her view that the global economy matters to the Fed, and that it need not rush into a rate hike.
“To the extent that the effect on inflation of further gradual tightening in labor market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling,” she said on September 12.
‘Like waiting for Godot’
An increase could happen Wednesday, but it would shock markets. Based on CME fed fund futures trading, the markets give a rate increase Wednesday a 12 percent chance.
“Waiting for the Fed to hike rates is like waiting for Godot,” said Steven Ricchiuto of Mizuho Securities.
“No matter how often the makers of domestic monetary policy signal that they are primed to hike rates, the data fails to give them the opportunity, and the September FOMC meeting is likely to be the next in a long string of false positives.”
While the US is much stronger than the other major economies, the Fed is caught in a similar quandary to the European Central Bank and the Bank of Japan. The economic data is neither strong enough nor consistent enough to tighten the current policy.
Last week the ECB held rates steady as it seeks proof that its massive stimulus program, with negative interest rates, is working.
And the BoJ will also meet on Tuesday and Wednesday amid doubts that its own extreme efforts, also including negative interest rates, are having a positive impact.
“The thinking seems to be… that the Bank of Japan is going to offer some easing this week and in the meantime the Fed is not expected to raise rates,” said Chris Low of FTN Financial.