Di­vided Fed to leave rates un­touched; US vote looms

Kuwait Times - - BUSINESS -

De­spite some divi­sion in its ranks, the US Fed­eral Re­serve is ex­pected to leave in­ter­est rates un­changed yes­ter­day as pol­i­cy­mak­ers gath­ered in the shadow of the hotly con­tested pres­i­den­tial elec­tion. De­spite some re­cent signs of im­prov­ing health in the world’s largest econ­omy, an­a­lysts say the Fed­eral Open Mar­ket Com­mit­tee, the Fed’s mon­e­tary pol­icy board, is not un­der pres­sure to move on rates so close to the start of vot­ing.

Tim Duy, an econ­o­mist at the Univer­sity of Ore­gon and au­thor of the Fed Watch blog said the Fed mem­bers have con­cluded they should raise rates be­fore the end of the year, but they likely will wait un­til they are no longer shar­ing the stage with White House can­di­dates Don­ald Trump and Hil­lary Clin­ton. “There is re­ally no press­ing rea­son in the data to hike rates,” Duy said. Rais­ing rates just be­fore an elec­tion, which could in­vite need­less po­lit­i­cal con­tro­versy, is rare for the Fed, which has done so only once since the 1980s.

How­ever, re­searchers say there is lit­tle ev­i­dence the FOMC acts based on the US po­lit­i­cal cal­en­dar. In­stead, the Fed may use the oc­ca­sion to put the pub­lic on no­tice to ex­pect a rate in­crease in De­cem­ber. Fed Chair Janet Yellen in re­cent months has sig­naled that the case for rais­ing rates has grown stronger. Yet even that is far from guar­an­teed. “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 has been far slower and more shal­low than fore­cast by the Fed since last De­cem­ber, as the FOMC re­peat­edly put off rais­ing rates cit­ing weak global and do­mes­tic eco­nomic per­for­mance and un­cer­tainty from po­lit­i­cal events. Some US pol­i­cy­mak­ers wanted to raise rates sooner to ward off pos­si­ble in­fla­tion. But they have been out-voted by other FOMC mem­bers who did not want to in­ter­rupt what has been a dis­ap­point­ingly slow eco­nomic re­cov­ery. Since the last pol­icy meet­ing in Septem­ber, the US econ­omy has gained strength, 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. How­ever, the eco­nomic and po­lit­i­cal cal­en­dars con­tain much which could de­rail a De­cem­ber rate hike, such as rau­cous US elec­tions and their uncer­tain after­math, two more monthly jobs re­ports, and strug­gling crude mar­kets, as well as po­lit­i­cal de­vel­op­ments in Europe. Fed funds rate fu­tures, which in­di­cate in­vestor ex­pec­ta­tions for mon­e­tary pol­icy, Tues­day showed the like­li­hood the Fed will not raise rates this week at 93 per­cent. But the prob­a­bil­ity of a hike in De­cem­ber is 73 per­cent. The elec­tions also had Wall Street flum­moxed, with all three ma­jor US in­dices fin­ish­ing be­tween 0.6 and 0.7 per­cent lower on the un­cer­tainty gen­er­ated by the bit­ter bat­tle for the White House. — AFP

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