close

Fed holds line on key rate, hints at coming increase

5 min read
article image -

WASHINGTON – The Federal Reserve is keeping its key interest rate unchanged, but is signaling it will likely raise rates before year’s end.

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

The central bank characterized the near-term risks to its economic outlook as “roughly balanced” – the first time it used that wording since late last year, when it most recently raised rates. Most analysts said they believe the Fed will next raise rates in December.

In its statement, the Fed said its policy committee concluded “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 toward its objectives.”

For the first time in nearly two years, and for the first time since Janet 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.

The Fed’s next meeting will be just a week before the November elections, and most analysts believe 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.

On Wednesday, the Fed also issued updated economic forecasts, which reduced its expectation for rate increases this year to one from two. The Fed now expects two rate increases in 2017 and three in 2018, down from three each year in previous forecasts.

And it lowered its expectation for the long-range level of its key policy rate to 2.9 percent, down from 3 percent in June and 3.5 percent before then.

Until recently, many Fed watchers thought a rate hike was likely this week. They believed the Fed, starting with a late-August speech by Yellen in Jackson Hole, Wyo., was preparing investors for an imminent increase.

Yellen suggested then, given the job market’s solid gains and the Fed’s outlook for the economy and inflation, “the case for an increase in the federal funds rate has strengthened in recent months.”

Other Fed officials, including Vice Chairman Stanley Fischer, made similar observations, seemingly part of a collective signal that a September rate hike was probable if not definite.

Sentiment shifted, though, after Lael Brainard, a Fed board member and Yellen ally, laid out the case for delaying a resumption of rate increases. Brainard’s comments, coupled with a string of weaker-than-expected economic data, led watchers to conclude there will likely be no rate increase this week.

Still, many analysts expected the statement the Fed released Wednesday to signal that modestly higher lending costs were coming soon – in part to satisfy the growing number of Fed officials who pushed for a resumption of rate increases.

Some economists pointed to the minutes of the Fed’s July meeting and comments from officials since then to suggest the central bank’s “hawks” – who believe it should be acting faster to raise rates – are gathering adherents from the dove camp. Doves tend to be wary of raising rates quickly for fear for undermining growth.

Others said members of the dove camp, who include Yellen, weren’t yet convinced, especially after the recent string of tepid readings on the economy.

Job growth slowed in August. A manufacturing gauge slid back into recession territory. An index that tracks the services economy, where most Americans work, fell to its lowest level since 2010. U.S. shoppers retreated in August to depress retail sales after four straight monthly gains.

These were signs, too, the economy might be struggling to accelerate after three straight quarters of anemic growth.

And perhaps most critical for some Fed officials, inflation has yet to make significant progress in rising toward the central bank’s 2 percent target range.

The Fed’s statement 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.

Analysts expressed doubt, though, the Bank of Japan’s new target would change the mindset of shoppers and businesses long used to a stagnant economy and flat or declining prices. They said they expected Japan’s central bank to eventually slash its policy rate further.

In Europe, Mario Draghi, head of the European Central Bank, is seeking help from the governments of the 19 counties that use the euro currency. The ECB this month left its aggressive stimulus measures unchanged and urged European governments to spend more on infrastructure and to enact reforms to make their economies more efficient and business-friendly.

The eurozone economy is growing slowly, but inflation remains well below the ECB’s 2 percent annual target.

CUSTOMER LOGIN

If you have an account and are registered for online access, sign in with your email address and password below.

NEW CUSTOMERS/UNREGISTERED ACCOUNTS

Never been a subscriber and want to subscribe, click the Subscribe button below.

Starting at $3.75/week.

Subscribe Today