The US Federal Reserve (Fed) kept interest rates unchanged on Wednesday and in a direct reference to its next meeting, put a December rate hike firmly in play.
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With no meeting scheduled for November, policymakers will meet again on 16 December when markets will be braced for the prospect of the first rate rise since 2006.
The Federal Open Markets Committee said it would determine whether it will be appropriate to raise the target range at its next meeting after assessing the progress – both realized and expected – toward its objectives of maximum employment and 2 per cent inflation. Expectations for a rate hike in October remained minimal, but the Fed’s comments on Wednesday afternoon encouraged a number of analysts and economists to predict a jump in rates in December. The Standard & Poor’s 500 index is 0.2% lower and the Nasdaq composite is off 0.3%.
Although Fed chairwoman Janet Yellen indicated she was less dubious about global volatility than she was in her September announcement, she iterated the Fed would hike rates when employment picks up and inflation moves closer to 2%. As we discussed in yesterday’s note inflation is still a big worry for the Fed and whether in two years time it will be back towards their target as interest rates are on the rise.
While many expect the Fed will raise interest rates at its next meeting, a few economists still feel monetary policy will not begin to tighten until next year.
Stein said a December hike is likely, but anything could happen in two months.
The Federal Reserve maintained that the economy was growing albeit modestly which continues to be a cause for concern. Its action rocked markets and escalated fears that the world’s second-largest economy was weaker than thought and could derail growth in the United States.
Top Federal Reserve officials appeared more sanguine about the outlook for the USA economy, with the statement pointing to the “solid” growth in consumer spending and business investment and the continued improvement in housing.
Now that unemployment has fallen to 5.1 percent, officials are anxious about inflation that is so low it threatens to drop into a cycle of falling prices and wages called deflation that could dry up demand and hurt the economy.
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None of which means the Fed is certain to pull the interest-rate trigger in mid-December.
