Fed's more upbeat tone suggests rate hike sometime this year
The Federal Reserve said on Wednesday that near-term risks to the United States economy have diminished, reviving the prospect that it will resume raising interest rates as soon as September.
The Fed noted that the US job market has rebounded, with robust hiring in June after a deep slump in May. At the same time, the Fed said in a statement after its latest policy meeting that it plans to closely monitor global economic threats and financial developments to ensure that they do not slow the economy.
The Fed seemed to be referring in particular to Britain's vote last month to leave the European Union a move that poses risks to the rest of Europe and to the global economy.
The central bank gave no specific timetable for when it might resume the rate hikes it began in December, when it raised its benchmark rate from a record low. But some analysts who had doubted that the Fed would be ready to raise rates as soon as September said Wednesday's statement appeared to revive that possibility.
"The Fed is saying that near-term risks have diminished, so that certainly puts September back in play," said Brian Bethune, an economics professor at Tufts University.
Bethune said he still thought the Fed would wait until December before raising rates, but that a September move was possible if hiring remains strong and the global economy and markets remain stable.
Greg McBride, chief financial analyst at Bankrate.com, noted that "the Fed gave a very upbeat assessment of the US economy, which is the first step towards prepping markets for another rate hike."
No Brexit hindrance
Some also suggested that the Fed's brighter outlook suggests that it has become less concerned that a British exit from the EU - commonly dubbed 'Brexit' - would seriously undermine the US or global economy.
The statement signals that the Fed "does not think that Brexit will be a significant hindrance for the US economy," said Carl Tannenbaum, chief economist at Northern Trust.
Analysts said the next important signal of the Fed's thinking could come when Chair Janet Yellen speaks at an annual central bank conference in late August in Jackson Hole, Wyoming.
Stock averages posted a modest increase on Wednesday after the statement was issued at 2 p.m. Eastern time, before drifting lower later in the afternoon. The yield on the 10-year Treasury note dipped from 1.53 per cent to 1.51 per cent.
The decision to leave its key rate unchanged in a range of 0.25 per cent to 0.5 per cent was approved on a 9-1 vote. Esther George, the president of the Fed's Kansas City regional bank, dissented for the third time this year, arguing for an immediate quarter-point rate hike.
A few months ago, it was widely assumed that the Fed would have resumed raising rates by now, but that was before the US government issued the bleak May jobs report and Britain's vote last month to quit the EU triggered a brief investor panic.
Since then, though, a resurgent US economy, the bounce-back in hiring and record highs for stocks have led many economists to predict a Fed move by December, if not sooner. In June, employers added 287,000 jobs, the most since October 2015.
In December, when the Fed raised its benchmark rate from a record-low near zero, it also laid out a timetable for up to four additional rate hikes this year, but intensified fears about China's economy and a plunge in oil prices sent markets sinking and led the Fed to delay further action.
Once the markets stabilised, the Fed signalled a likely rate increase by midyear. Anaemic hiring in April and May, though, raised concerns, and it left rates alone. The central bank was also affected by Britain?s forthcoming vote on whether to leave the EU, anticipation of which had rattled investors.
Economy picking up
Now, though, the pendulum has swung back, especially after the arrival of a reassuring June jobs report. The Standard & Poor's 500 stock index had plunged 5.3 per cent in the two trading days after Britain's vote. It has since regained all those losses and set new highs.
The economy is also picking up after the year's anaemic start. Stronger consumer spending is thought to have lifted growth, as measured by the gross domestic product from the January-March quarter to the April-June quarter, with further acceleration expected later this year. In the spring, consumers boosted spending at the fastest pace in a decade. Economists also foresee a lift from business investment, reflecting a rebound from cutbacks in the energy sector.
All that strength might argue for a September rate hike, especially if monthly job growth equals as least 200,000 between now and then. Still, the risks of raising rates again too soon and possibly choking off economic activity may seem greater to the Fed than the risks of waiting longer. It has room to accelerate its rate increases if the economy were to heat up so much as to ignite high inflation.