Hints of Fed action by year-end

> Majority of monetary policy committee members believe key interest rate should be higher than 0.5%

WASHINGTON: The US Federal Reserve looks likely to raise its key interest rate before the end of 2016, based on individual members’ projections issued on Wednesday.

The US central bank balked, though, at taking immediate action, as its monetary policy committee decided to maintain very low interest rates, pending signs of higher inflation and further strengthening of the labour market.

In a statement, the Fed said that it “judges that the case for an increase in the (benchmark) federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

The Fed released a chart showing that 14 of the committee’s 17 participants believe the “appropriate target range” for the benchmark rate will be higher than 0.5% before the end the year.

Only three people were recorded as projecting the current range – 0.25% to 0.5% – through the end of 2016. Similarly, 14 of the 17 participants expected that the key interest rates should top 1%by the end of 2017.

The next monetary policy statement is due on Nov 2, six days before the presidential/ general elections, making interest rate adjustments unlikely for the Fed, which strives to remain above politics. The following meeting, which concludes on Dec 14, is seen as the likely date for Fed action.

The Fed raised its benchmark interest rate in December 2015 from an unprecedented near-zero target – in place since the 2008 financial crisis – to a range of 0.25-0.5%.

The median of Fed participants’ US economic growth projections was 1.8% for this year, and 2% annually for 2017 and 2018. The US economy grew in the April-July quarter at an annualised 1.1%, well short of Wall Street expectations.

The disappointing performance followed a first quarter in which expansion was just 0.8% at an annual rate, according to the federal Bureau of Economic Analysis.

Fed chair Janet Yellen said Fed participants now see the neutral interest rate – or the monetary policy that would spur neither expansion nor contraction – as “currently quite low by historical standards”. Therefore, the present rate below 0.5% is “only modestly accommodative,” she said.

The Fed’s lack of action on Wednesday “does not reflect a lack of confidence in the economy”, Yellen said.

“But with labour market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labour market remaining, and inflation continuing to run below our 2%-target, we chose to wait for further evidence of continued progress toward our objectives.” – dpa