WASHINGTON, USA – The Federal Reserve left key interest rates untouched Wednesday, July 27, but acknowledged improved economic performance, suggesting a rate increase may still be on the horizon in 2016.
Policy makers had not been expected to raise rates, out of concern that a hike could stifle fragile growth.
Their improving view on economic conditions left open the possibility of an increase in the benchmark federal funds rate, currently at 0.25-0.50%, by December.
Putting behind the surprise sharp downturn in job creation in May that had raised worries about the economy, the Federal Open Market Committee, which sets the monetary policy, said employment and economic growth had grown moderately since their mid-June meeting.
They also appeared to see less threat to US growth from Britain’s vote to leave the European Union, which took place a week after the last FOMC meeting.
“Near-term risks to the economic outlook have diminished,” the FOMC said in announcing the outcome of the closely watched two-day meeting in Washington.
Inflation rate hawks and doves had been split in June over how strong the economy was, and voted unanimously to hold off on raising rates until the situation became more clear.
The Fed has repeatedly said it wants to see increasing job growth and signs of stronger inflation before it raises rates.
While Wednesday’s statement cited moderate increases in growth in employment, it said inflation was expected to remain low in the near term.
As it had found in June, the committee said household spending was “growing strongly” while fixed investment from businesses remained “soft.”
But in a departure from its last meeting, the committee noted that payroll and other labor market data “point to some increase in labor utilization in recent months.”
Tim Duy, Senior Director at the Oregon Economics Forum, said a rate hike at the next FOMC meeting in September could not be ruled out.
“But it seems more likely that the critical mass of data to hike will not arrive until December,” he told AFP.
Following the statement, Fed funds futures traded on the CME, a kind of betting pool showing investor expectations, implied a 46.5% probability that the committee would increase rates before the end of the year, with the larger balance expecting the target rate to remain untouched through December.
The results suggested investors had expected the Fed to produce a rosier statement than the one released on Wednesday.
According to Steven Ricchiuto, chief US economist at Mizuho Securities USA, continued job growth could tip the balance in favor of a rate hike – especially given that the committee believes the threats to economic growth are now lower.
“This suggests that the countdown to a rate hike in September/December will start in earnest if we get another strong jobs report for July on August 5th,” Ricchiuto said.
Joel Naroff of Naroff Economic Advisers said the Fed appeared torn between optimism and fear.
“One thing this group has been consistent about is its one-meeting-the-sky-is-falling, the-next-meeting-the-sun-is-coming-out approach to economic analysis,” he said. “This was the good economy meeting that comes after the worrisome economy meeting.”
As for Brexit, Naroff said, “the members seem to have said ‘never mind’ and dropped those issues into the factors they are monitoring.”
Following Wednesday’s announcement, the dollar was slightly weaker against the euro at $1.1049.
Bond yields were also marginally lower. Ten-year Treasury bills were trading at 1.51%, down from 1.54 prior to the FOMC announcement.
The S&P 500, a broad-based measure of stock prices, pared losses after the report was released and finished down 0.1% on yesterday’s close at 2,166.58. – Rappler.com