Fed seen holding rates ‘steady’ as US inflation watch continues

Global headwinds, Brexit vote muddy the waters

SAN FRANCISCO, July 26, (Agencies): The US Federal Reserve is expected to keep interest rates unchanged this week, deferring any possible increase until September or December, as policymakers hold out for more evidence of a pickup in inflation.

Central to the debate at the Fed’s July 26-27 policy meeting will be how to reconcile upbeat US economic data, highlighted by strong job gains in June, with a global growth slowdown and other headwinds threatening the inflation trajectory.

For San Francisco Fed President John Williams, one of the 17 members participating in the central bank’s rate-setting deliberations, all that is needed is a bit more confidence that inflation is indeed headed toward the Fed’s 2 percent target. The inflation measure the Fed prefers to track is currently at 1.6 percent. With monthly job gains well above the level needed to prevent an uptick in unemployment,

In this file photo, the Washington news conference of Federal Reserve Chair Janet Yellen is reflected in a specialist’s screen on the floor of the New York Stock Exchange. Anyone trying to peg the likelihood of a Federal Reserve interest rate

and no signs of a rise in productivity, some Fed policymakers are likely to argue for a quick increase in rates to avoid a surge in inflation.

“That is the danger — and you can be sure that the hawks are going to be arguing that,” said Alan Blinder, a Princeton University professor and a former Fed vice chairman. “I have a hunch that they will talking in July about September.”

Other policymakers, like influential New York Fed President William Dudley, have signaled they would rather wait for more tangible signs of a rise in inflation before pulling the trigger on a rate increase. “There’s not a lot of reason to raise rates until inflation goes up,” said Kevin Logan, chief US economist at HSBC in New York.

The US central bank is scheduled to issue its latest policy statement at 2 pm EDT (1800 GMT) on Wednesday.

The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade, and signaled four rate hikes were coming in 2016 as it moved to “normalize” the ultra-stimulative monetary policy adopted in response to the 2007-2009 financial crisis.

But headwinds in the global economy, financial market volatility and uncertainty over the impact of Britain’s decision to leave the European Union forced it to delay a rate hike and scale back the number of projected hikes to two for the year.

Still, absent a shock to markets or a reversal in US economic data, even dovish policymakers like Dudley have signaled that their cautious approach to normalizing monetary policy likely allows for at least one rate hike this year.

After Wednesday, the Fed has three more policy meetings scheduled this year — in September, November and December. A November rate hike is seen as highly unlikely, as that meeting comes one week before the US presidential election.

Economists polled by Reuters expect the Fed to hold rates steady until after the election.

hike in 2016 has seen a topsy-turvy shift of expert opinion so far in the year. A bleak May jobs report and a panic that followed Britain’s vote to quit the European Union had dimmed earlier expectations for a rate hike. (AP)

Market

“Rate normalization has fallen down the Fed priority list and will remain there until the dust is well settled on the financial markets and the economy,” Jefferies economists predicted in a note last week.

In advance of the start of the meeting, US markets were flat, mostly focused on the latest corporate earnings.

At 1500 GMT, the Dow Jones Industrial Average was largely unchanged at 18,483.81 while the S&P 500 was equally tranquil at 2,170.35. The tech-heavy Nasdaq was up 0.4 percent at 5,117.63.

After holding key interest rates at near zero for seven years to aid recovery from the Great Recession, the Federal Open Markets Committee in December announced the start of a series of rate hikes.

By February they had gotten cold feet, however, and were split in June, with some members fearing that easy money would foster risk-taking and financial instability or require a sudden rate hike.

Inconsistent jobs data, consistently low inflation and Britain’s looming vote on whether to secede from the European Union persuaded the committee not to continue raising rates.

While the world’s attention was transfixed by Brexit last month, other questions such as persistently low inflation may now be coming to the fore.

“I don’t think they’re going to raise rates at all this year,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.

The 12-member committee, comprising the seven governors of the Federal Reserve and eight presidents of regional reserve banks, is responsible for setting the rates for overnight loans between banks within the Federal Reserve system.

Changes in the federal funds rate reverberate throughout the global economy, affecting exchange rates, the supply of money and credit, long-term interest rates as well as prices, employment and other market conditions.