The FOMC expressed confidence that inflation will move up toward its 2.0 percent target “as the labor market improves further and the transitory effects of declines in energy and import prices dissipate”. In its closely scrutinized policy statement Wednesday the Fed gave a more positive assessment of the USA economy and downgraded its fears that global market tumult and worldwide developments would have an appreciable negative impact on growth at home.
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“The committee continues to see the risks to the outlook for economic activity and the labor market as almost balanced but is monitoring global economic and financial developments”, it said.
We expect the Federal Reserve to bump up short-term interest rates by a quarter-point at their December 17 meeting.
No rate hike: that’s the message from the Federal Reserve’s October statement, but brace for a December liftoff.
Still, the Fed noted that the economy is expanding only modestly. “Fears about a collapse in China’s economy have faded a little in recent weeks and USA stock markets have now largely recovered the losses sustained during the slump in late August”, Gambarini said.
In addition the FOMC made a particular reference to its December meeting raising the prospect of a first rate rise this year.
Analysts are now looking favourably at a rate hike before the end of the year, with futures contracts implying a 43% possibility December is the call, compared to 34% prior to the statement, according to Reuters.
“December’s not only still on the table, it’s in the cross hairs as a liftoff date”, said Ward McCarthy, chief financial economist at Jefferies Group in New York, one of the 22 primary dealers that trade with the Fed. For the last few months the Federal Reserve officials were of the opinion that the economy was gaining strength and therefore it will be able to tolerate the hike in the interest rate. Fed Chair Janet Yellen has since said the bank would still increase rates this year, though a few other policymakers have said otherwise.
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USA equities turned sharply higher on the news that the Federal Reserve would not raise rates, and the 10-year Treasury yield rose three basis points, but remains near its lowest point at 2.1%.
