Fed to wait for more economic progress before rate hike

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WASHINGTON: The US Federal Reserve said Wednesday (Thursday in Manila) the case for raising interest rates has strengthened further with improving economic conditions, but monetary policymakers decided to wait for more progress before acting.

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Just a few days before the bitterly contested presidential election, the US central bank kept the benchmark interest rate at the same level where it has been since December 2015, a move universally expected by analysts.

However, the Fed, while not explicit on the timing, left the door open to a rate hike soon, possibly in the next meeting on December 13-14. But analysts were divided over how to interpret the hints given by the Federal Open Market Committee, the Fed’s monetary policy arm.

The key rate has been at 0.25-0.5 percent for nearly a year, after spending the years since the 2008 crisis at zero. The rate is the benchmark for many types of credit, including home mortgages and car loans.

Early this year the central bankers said they expected several rate cuts before 2017, but have held off over concerns of derailing a fragile economic recovery.

Two FOMC members dissented on the decision, favoring an immediate rate increase: the Federal Reserve Bank presidents of Kansas City, Esther George, and Cleveland, Loretta Mester. In September there were three dissents.

Their policy statement noted continued improvement in the labor market and economic growth, as well as slight increases in inflation, a key focus of the FOMC.

“The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” the FOMC said.

Many economists believe there is a strong chance the Fed finally will raise rates at the December meeting, when it will have the benefit of two more months of inflation and employment data —not to mention the outcome of the election.

‘No definitive signal’

“We fully expect this evidence to emerge over the next six weeks, so only a shock—the election of (Donald) Trump, or an external geopolitical or market event —can now prevent a December hike,” Ian Shepherdson of
Pantheon Macroeconomics said in a research note.

However, Jason Schenker of Prestige Economics said “there was no signal of an imminent rate hike for December.”

And Jim O’Sullivan of High Frequency Economics said the Fed did not “send any definitive signal in the statement about December.”

Analysts will continue to debate that point, which hinges on a slight language change which said policymakers want to see “some” further evidence of continued progress toward its targets for employment and 2 percent inflation.

That may or may not be a stronger signal for a rate hike compared to September, when they said only that they need to see “further evidence.”

Barclays analysts said the FOMC’s goal was “to keep expectations centered on a December rate hike while also maintaining flexibility to delay action, should events in the next two months not materialize as expected.”

The FOMC also toned down some language about economic performance, noting that household spending is “rising moderately,” rather than “growing strong” as it was in the September statement. And it repeated that business investment “remained soft.”

It also noted that while inflation measures “have moved up” they remain below the 2 percent target, due to energy price declines in recent months.

Still, Barclays said, “Our read of the statement suggests that the Fed achieved these goals and we continue to expect a rate hike at the December meeting.”

Stock markets were little changed by the decision, with the Dow off 0.3 percent in afternoon trading.

AFP

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