Sun | Aug 20, 2017

Fed will consider December rate hike

Published:Thursday | October 29, 2015 | 10:00 AM
US Federal Reserve Chair Janet Yellen.

The United States Federal Reserve is keeping its key short-term interest rate at a record low in the face of threats from a weak global economy and excessively low inflation. But it suggested the possibility of a rate hike in December.

A statement the Fed issued Wednesday said it would seek to determine "whether it will be appropriate to raise the target range at its next meeting" by monitoring the progress on employment and inflation. It marked the first time in seven years of record-low rates that the central bank has raised the possibility that it could raise its benchmark rate at its next meeting.

In a further signal that a rate hike could occur at their last meeting of the year, policymakers sounded less gloomy about global economic pressures. They removed a sentence from their September statement that had warned about global pressures after news of a sharper-than-expected slowdown in China.

"They implied they'd do it this year," Patrick O'Keefe, director of economic research at the accounting firm CohnReznick, said after the Fed issued its statement after ending its latest policy meeting. "The economy is not cooperating. It has to be immensely frustrating ...The global economy is still decelerating and we're seeing a softening of growth domestically."

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expects a December rate hike if the jobs reports for October and November show the labour market is getting stronger.

"Some combination of payrolls, unemployment and wages signalling continued improvement will be enough," he wrote in a note to clients.

Still, the Fed indicated that the economy is expanding only modestly. And in a nod to recent weaker data, policymakers said in their statement that the pace of job gains had slowed - an indication that they may be concerned about the pace of hiring.

While many Fed officials have signalled a desire to raise rates before year's end, tepid economic reports in recent weeks had led some analysts to predict no hike until 2016.

The Fed's statement Wednesday was approved on a 9-1 vote, with Jeffrey Lacker, president of the Fed's Richmond regional bank, dissenting. As he had in September, Lacker favoured a quarter-point rate hike.

The Fed has kept the target for its benchmark funds rate at a record low in a range of zero to 0.25 per cent since December 2008.

Yellen after the September meeting noted that 13 of 17 Fed officials expected the first rate hike to occur this year. But some economic reports since then have been subpar including a slowdown in job growth for September.

Some of the US weakness has occurred because of a global economic slowdown, led by China, that's inflicted wide-ranging consequences. US job growth has flagged. Wages and inflation are subpar. Consumer spending is sluggish. Investors are nervous. And manufacturing is being hurt by a stronger dollar, which has made US goods pricier overseas.

The Fed cut its benchmark rate to near zero during the Great Recession to encourage borrowing and spending to boost a weak economy. Since then, hiring has significantly strengthened, and unemployment has fallen to a seven-year low of 5.1 per cent.

But the Fed is still missing its target of achieving annual price increases of 2 per cent, a level it views as optimal for a healthy economy.