Of course, the headline decision doesn’t tell the whole story.
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Concern about igniting an overreaction in financial markets is a key reason economists think the Fed will show extreme caution in raising rates. While the statement from the FOMC was nearly laser-focused on the unemployment dynamics of the US economy, there is not much to be optimistic about there if decent growth is not forthcoming. Strategists read the new “some further improvement” as a more hawkish tempering of language, suggesting it sees the labor market improvement as very almost sufficient. It also points out that business fixed investment and net exports stayed soft.
“The labor market continued to improve, with solid job gains and declining unemployment”, the Fed said in a statement.
Back during the June meeting, the FOMC said that the conditions warranting an increase in the target range for the federal funds rate had not yet been met, and that additional information on the outlook, particularly for labor markets and inflation, would be necessary before deciding to implement such an increase.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Following the Fed meeting on Wednesday, eyes shifted to yesterday’s GDP announcement from the States.
Deutsche BankAt Bank of America Merrill Lynch, Michael Hanson wrote that, like Deutsche Bank and other firms, he doesn’t expect any wholesale changes to the Fed statement, looking instead for “a cautiously optimistic if noncommittal message”. With the U.S. economy and job market now steadily rising, the need for ultra-low rates to stimulate growth is fading.
One drawback is that cheap money can raise the inflation rate, which now remains well below the Fed’s target rate of 2 percent. As it stands, markets (per Sterling 90-day options contracts) are pricing in a February 2016 rate hike; whereas policymakers have increasingly indicated that a rate move in 2015 is possible.
Gross domestic product rose at a 2.3% annual rate from April to June, according the Commerce Department. Voting Fed members unanimously signed off on the central bank’s latest policy statement.
The next piece of data the Fed will consider comes to us next week via the July employment report.
“The economy has a lot of momentum, and if you don’t start raising rates off zero, then it will be hard to curtail that momentum and inflation will become a problem down the road”, said Mark Zandi, chief economist at Moody’s Analytics.
The Fed did, however, retain its caveat in the form of its data-dependent policy mantra.
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Yet Yellen has left little doubt that the Fed is preparing to raise short-term rates by year’s end from the near-zero lows it set at the depths of the 2008 financial crisis. Earlier in New Zealand, June building consents fell 4.1% month-on-month compared to an expectation of a 2.5% gain.
