STAYING THE COURSE
Measured language keeps US central bank on course for December hike
The Fed leaves rates unchanged and remains on course to hike them next month despite recent jitters and a critical president.
The Federal Reserve left interest rates unchanged and stayed on course to hike them in December despite recent jitters in financial markets and a critical president.
The US central bank said “economic activity has been rising at a strong rate” and job gains “have been strong”, acknowledging a drop in the unemployment rate, while repeating its outlook for “further gradual” rate increases in its statement Thursday following a two-day meeting in Washington.
Risks to the outlook appear “roughly balanced”, the Federal Open Market Committee (FOMC) said, leaving that language unchanged from the prior meeting in late September. Inflation expectations, which have slipped slightly in recent weeks according to some measures, were described as “little changed, on balance”, the same as in the last statement.
“Absent anything new between now and the last meeting of the year, they’ll continue on with another 25-basis-point increase” in December, said James Kahn, an economics professor at Yeshiva University and a former vice-president at the New York Fed. “The language is designed to try to not look too far ahead,” to give them flexibility, he said.
By keeping the door open to a fourth 2018 hike in December, officials are sticking to their gradual upward path, trying to prolong the second-longest US expansion on record without making an error. Leaving monetary policy too loose risks stoking excess inflation and asset bubbles, while tightening too fast could cause a recession.
The unanimous 9-0 decision left the benchmark federal funds rate in a target range of 2-2.25%, following eight quarter-point hikes since late 2015. The interest rate the Fed pays banks on excess reserves — a tool for keeping the effective funds rate within the Fed’s target range — was left unchanged at 2.2%, as expected.
Stocks slipped and the dollar extended gains after the decision was announced, with the S&P 500 Index closing 0.3% lower at 2,806.83. Odds of a December rate hike were about 74%, according to pricing in interest rate futures in late New York trading.
INVESTMENT EASED
In one of the only other tweaks to the statement, the FOMC said growth in business fixed investment has “moderated from its rapid pace earlier in the year”, compared with the previous assessment that it has “grown strongly”. Third-quarter data showed non-residential investment increased at the slowest pace in almost two years.
Meanwhile, household spending “has continued to grow strongly”, the Fed said, echoing its previous assessment of consumption, which accounts for about 70% of the economy.
Chairman Jerome Powell and colleagues are feeling their way toward a more normal policy setting after years of extraordinary stimulus.
The tightening cycle may be crimping some segments of the economy. US stocks suffered their steepest losses last month since 2011 in part because of concern the Fed could slow the economy too much. Sales of previously owned homes were down 4.1% in September from a year earlier, and the cost of a 30-year fixed mortgage hit an eight-year high last week.
The task of getting policy right is also complicated by harsher political scrutiny. President Donald Trump criticised past rate shifts and blamed the Fed for the market meltdown in advance of this week’s midterm elections, which delivered control of the House of Representatives to Democrats.
A year since being nominated by Mr Trump to helm the Fed, Mr Powell is overseeing an economy in a sweet spot: It grew 3% over the past four quarters, and for the first time since the Fed introduced its 2% inflation objective in 2012, both the headline and core measures of year-on-year price changes hit the goal in September.
Unemployment is at 3.7%, the lowest in 48 years, while rising wages and demand for labour are pulling more people into the workforce, helping offset retirements by baby boomers.
Fed officials will update their forecasts in December having previously forecast three increases in 2019, which would put the main rate roughly at levels that policymakers see as neither boosting nor restraining the economy.
This is the last Fed decision this year without a press conference.