Fed keeps key rate un­changed but hints of com­ing hike

Jamaica Gleaner - - BUSINESS -

THE US Fed­eral Re­serve is keep­ing its key in­ter­est rate un­changed but sig­nalling that it will likely raise rates be­fore year’s end.

The Fed said in a state­ment end­ing its lat­est pol­icy meet­ing Wed­nes­day that the United States job mar­ket has con­tin­ued to strengthen and eco­nomic ac­tiv­ity has picked up. But it noted that busi­ness in­vest­ment re­mains soft and in­fla­tion too low, and that it wants to see fur­ther im­prove­ment in the job mar­ket.

The cen­tral bank char­ac­terised the near-term risks to its eco­nomic out­look as “roughly bal­anced”.

It was the first time it has used that word­ing since late last year, when it most re­cently raised rates. Most an­a­lysts have said they think the Fed will next raise rates in De­cem­ber.

The Fed said its pol­icy com­mit­tee had con­cluded that “the case for an in­crease in the fed­eral funds rate has strength­ened but de­cided, for the time be­ing, to wait for fur­ther ev­i­dence of con­tin­ued progress to­wards its ob­jec­tives”.

“The Fed ap­pears to be firmly on track for a De­cem­ber hike,” Paul Ash­worth, chief US econ­o­mist at Cap­i­tal Eco­nom­ics, said after the state­ment was is­sued.

Stock prices rose in the hour after the Fed is­sued its state­ment and dur­ing a news con­fer­ence by Chair Janet Yellen that laid out her case for hold­ing off on a rate hike for now.

In her news con­fer­ence, Yellen of­fered a sim­ple ex­pla­na­tion for why the Fed didn’t raise rates: The econ­omy can still grow with­out hurt­ing it­self.

The Fed chair noted that his­tor­i­cally low rates haven’t caused the econ­omy to over­heat as some an­a­lysts feared they would. Steady job gains have pulled dis­cour­aged work­ers back into the job mar­ket and yet in­fla­tion re­mains be­low the Fed’s 2 per cent tar­get rate.

“The econ­omy has a lit­tle more room to run than pre­vi­ously thought,” Yellen said.

In­deed, the Fed made clear in US Fed­eral Re­serve chair, Janet Yellen. up­dated fore­casts it is­sued reach the Fed’s tar­get next year Wed­nes­day that it ex­pects be­fore achiev­ing 2 per cent in growth to re­main tepid for the 2018 and 2019. In­fla­tion has next three years. It ex­pects the re­mained be­low that level for econ­omy to ex­pand just 1.8 per more than three years. cent this year and by an al­most

For the first time in nearly two equally slug­gish 2 per cent in

years and for the first time since both 2017 and 2018. Yellen be­came Fed chair in Fe­bru­ary 2015, there were three dis­sents to the Fed’s state­ment. The three of­fi­cials are all pres­i­dents


The pol­i­cy­mak­ers also fore­cast that in­fla­tion will nearly of re­gional Fed banks — Es­ther Ge­orge of Kansas City, Loretta Mester of Cleve­land and Eric Rosen­gren of Bos­ton. All wanted the Fed to raise its key rate at this meet­ing.

“This seems to have been one of the most di­vi­sive FOMC meet­ings in re­cent mem­ory,” Ash­worth said.

The Fed’s next meet­ing is just a week be­fore the Novem­ber elec­tions, and most an­a­lysts think it wouldn’t want to raise rates so close to when vot­ers go to the polls. That’s why the last meet­ing of the year in De­cem­ber is seen as the most likely time for the next rate hike as long as the econ­omy keeps im­prov­ing in line with the Fed’s ex­pec­ta­tions.

In its up­dated fore­casts, the Fed low­ered its ex­pec­ta­tion for the long-range level of its bench­mark in­ter­est rate to 2.9 per cent from 3 per cent in June and 3.5 per cent be­fore then.

The Fed’s state­ment on Wed­nes­day was is­sued hours after the Bank of Ja­pan, strug­gling to re­ju­ve­nate an ail­ing econ­omy, set a more am­bi­tious goal for rais­ing in­fla­tion and an­nounced steps meant to raise the prof­itabil­ity of fi­nan­cial firms.


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