As elec­tion looms, di­vided Fed be­gins meet on rates

Kuwait Times - - BUSINESS -

A di­vided US Fed­eral Re­serve yes­ter­day be­gan a two-day meet­ing on in­ter­est rate pol­icy as bit­terly con­tested US elec­tions loomed large on the hori­zon. Most ob­servers and mar­ket play­ers do not ex­pect the Fed­eral Open Mar­ket Com­mit­tee, the Fed’s mon­e­tary pol­icy board, to an­nounce a rate hike when the meet­ing lets out on Wed­nes­day af­ter­noon, de­spite some re­cent signs of im­prov­ing health in the world’s largest econ­omy.

In­stead, the Fed may use the oc­ca­sion to put the pub­lic on no­tice to ex­pect a rate hike in De­cem­ber-though even that is far from guar­an­teed. Fed Chair Janet Yellen in re­cent months has sig­naled that the case for rais­ing rates has grown stronger. But the FOMC does not ap­pear to be un­der pres­sure to act im­me­di­ately.

Rais­ing rates so close to an elec­tion, which could in­vite need­less po­lit­i­cal con­tro­versy, is also rare for the Fed, which has done so only once since the 1980s. Re­searchers say, how­ever, that there is lit­tle ev­i­dence the FOMC acts based on the US po­lit­i­cal cal­en­dar. “Al­though we think the com­mit­tee will hike in De­cem­ber, our anal­y­sis sug­gests that the fun­da­men­tal macroe­co­nomic ar­gu­ment for hik­ing rates is as weak as it was last De­cem­ber when they hiked rates for the first time in a decade,” Steven Ric­chi­uto, chief econ­o­mist at Mizuho Amer­i­cas, said in a client note.

The course of pol­icy tight­en­ing an­nounced by the Fed since last De­cem­ber year has proven to be far slower and more shal­low than ex­pected, as FOMC mem­bers in 2016 have re­peat­edly put off rate hikes cit­ing weak global and do­mes­tic eco­nomic per­for­mance and un­cer­tainty from po­lit­i­cal events.

A mi­nor­ity of US cen­tral bankers fa­vor rais­ing rates im­me­di­ately but have been out-voted since the sum­mer by other FOMC mem­bers who be­lieve this could in­ter­rupt what has been a dis­ap­point­ingly slow eco­nomic re­cov­ery.

Since the Fed’s last meet in Septem­ber, the US econ­omy has gained pace, grow­ing at a 2.9 per­cent clip in the third quar­ter and adding a solid 156,000 jobs in Septem­ber, with un­em­ploy­ment hold­ing steady at 5 per­cent.

On an an­nual ba­sis, in­fla­tion stood at 1.2 per­cent in Septem­ber, its high­est level in nearly two years but well be­low the Fed’s 2 per­cent tar­get range. Eco­nomic and po­lit­i­cal cal­en­dars also con­tain much which could de­rail a De­cem­ber rate hike, such as rau­cous US elec­tions and their uncer­tain af­ter­math, two more monthly jobs re­ports, as well as strug­gling crude mar­kets and po­lit­i­cal devel­op­ments in Europe. Fed funds rate fu­tures, which in­di­cate in­vestor ex­pec­ta­tions for mon­e­tary pol­icy, put the like­li­hood that the Fed will not raise rates this week at 92.8 per­cent. But the prob­a­bil­ity of a hike in De­cem­ber is put at 70 per­cent. — AFP

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