Fed holds key rate, stays on track for Dec increase
POLICY STANCE Fed says ‘economic activity has been rising at a strong rate’ and job gains ‘have been strong’, repeats outlook for ‘further gradual’ rate hikes
The Federal Reserve left interest rates unchanged and stayed on course to hike in December despite recent jitters in financial markets and a critical president.
The US central bank said “economic activity has been rising at a strong rate” and job gains “have been strong”, acknowledging a drop in the unemployment rate, while repeating its outlook for “further gradual” rate increases in its statement on Thursday following a two-day meeting in Washington.
Risks to the outlook appear “roughly balanced”, the Federal Open Market Committee (FOMC) said, leaving that language unchanged from the prior meeting in late September. Inflation expectations, which have slipped slightly in recent weeks according to some measures, were described as “little changed, on balance”, the same as in the last statement.
“Absent anything new between now and the last meeting of the year, they’ll continue on with another 25 basis points increase” in December, said James Kahn, an economics professor at Yeshiva University and a former vice president at the New York Fed.
“The language is designed to try to not look too far ahead,” to give them flexibility, he said.
By keeping the door open to a fourth 2018 hike in December, officials are sticking to their gradual upward path, trying to prolong the second-longest US expansion on record without making an error. Leaving monetary policy too loose risks stok-
WASHINGTON:
ing excess inflation and asset bubbles, while tightening too fast could cause a recession.
The unanimous 9-0 decision left the benchmark federal funds rate in a target range of 2-2.25%, following eight quarter-point hikes since late 2015. The interest rate the Fed pays banks on excess reserves—a tool for keeping the effective funds rate within the Fed’s target range— was left unchanged at 2.2%, as expected.
Stocks slipped and the dollar extended gains after the decision was announced, with the S&P 500 Index closing 0.3% lower at 2,806.83.
Odds of a December rate hike were about 74%, according to pricing in interest-rate futures in late New York trading.
In one of the only other tweaks to the statement, the FOMC said growth in business fixed investment has “moderated from its rapid pace earlier in the year”, compared with the previous assessment that it has “grown strongly”.
Third-quarter data showed non-residential investment increased at the slowest pace in almost two years.
Meanwhile, household spending “has continued to grow strongly”, the Fed said, echoing its previous assessment of consumption, which accounts for about 70% of the economy.
Chairman Jerome Powell and colleagues are feeling their way toward a more normal policy setting after years of extraordinary stimulus.
A year since being nominated by Trump to helm the Fed, Powell is overseeing an economy in a sweet spot: It grew 3% over the past four quarters, and for the first time since the Fed introduced its 2% inflation objective in 2012, both the headline and core measures of year-on-year price changes hit the goal in September.
Unemployment is at 3.7%, the lowest in 48 years, while rising wages and demand for labour are pulling more people into the workforce, helping offset retirements by baby boomers.