Thu | Aug 17, 2017

Fed keeps key rate unchanged but hints of coming hike

Published:Thursday | September 22, 2016 | 9:00 AM
US Federal Reserve chair, Janet Yellen.

The US Federal Reserve is keeping its key interest rate unchanged but signalling that it will likely raise rates before year's end.

The Fed said in a statement ending its latest policy meeting Wednesday that the United States job market has continued to strengthen and economic activity has picked up. But it noted that business investment remains soft and inflation too low, and that it wants to see further improvement in the job market.

The central bank characterised the near-term risks to its economic outlook as "roughly balanced".

It was the first time it has used that wording since late last year, when it most recently raised rates. Most analysts have said they think the Fed will next raise rates in December.

The Fed said its policy committee had concluded that "the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress towards its objectives".

"The Fed appears to be firmly on track for a December hike," Paul Ashworth, chief US economist at Capital Economics, said after the statement was issued.

Stock prices rose in the hour after the Fed issued its statement and during a news conference by Chair Janet Yellen that laid out her case for holding off on a rate hike for now.

In her news conference, Yellen offered a simple explanation for why the Fed didn't raise rates: The economy can still grow without hurting itself.

The Fed chair noted that historically low rates haven't caused the economy to overheat as some analysts feared they would. Steady job gains have pulled discouraged workers back into the job market and yet inflation remains below the Fed's 2 per cent target rate.

"The economy has a little more room to run than previously thought," Yellen said.

Indeed, the Fed made clear in updated forecasts it issued Wednesday that it expects growth to remain tepid for the next three years. It expects the economy to expand just 1.8 per cent this year and by an almost equally sluggish 2 per cent in both 2017 and 2018.

 

Inflation targets

 

The policymakers also forecast that inflation will nearly reach the Fed's target next year before achieving 2 per cent in 2018 and 2019. Inflation has remained below that level for more than three years.

For the first time in nearly two years and for the first time since Yellen became Fed chair in February 2015, there were three dissents to the Fed's statement. The three officials are all presidents of regional Fed banks Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston. All wanted the Fed to raise its key rate at this meeting.

"This seems to have been one of the most divisive FOMC meetings in recent memory," Ashworth said.

The Fed's next meeting is just a week before the November elections, and most analysts think it wouldn't want to raise rates so close to when voters go to the polls. That's why the last meeting of the year in December is seen as the most likely time for the next rate hike as long as the economy keeps improving in line with the Fed's expectations.

In its updated forecasts, the Fed lowered its expectation for the long-range level of its benchmark interest rate to 2.9 per cent from 3 per cent in June and 3.5 per cent before then.

The Fed's statement on Wednesday was issued hours after the Bank of Japan, struggling to rejuvenate an ailing economy, set a more ambitious goal for raising inflation and announced steps meant to raise the profitability of financial firms.