Officials announced Wednesday at a meeting of the Federal Open Market Committee that the Federal Reserve will keep interest rates steady between 0.25 and 0.50 percent, while affirming a favorable outlook for the economy as a whole. It strengthened 1.4 percent Wednesday following the BOJ’s adjustment to its stimulus efforts and the Fed decision to hold rates. That is most evident in the healthy pace of job growth, which averaged 232,000 new positions over the last three months, and an unemployment rate of 4.9 percent. “The economy has a little more room to run than might have been previously thought”. There were fears that a hike in U.S. interest rates could trigger a flight of debt and equity investments away from emerging markets like India.
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That said, Yellen defended the Fed’s independence again Wednesday, saying its decisions are made without political considerations.
At a press conference, Yellen was asked if the upcoming election put pressure on the Federal Reserve not to act. “We do not discuss politics at our meetings”.
Maybe that remains the case, but central banks around the world are facing questions about the continued effectiveness of loose policy given that in many markets interest rates are already ultra-low or in negative territory. But Kansas City Fed President Esther George, who also dissented after the July meeting, was joined this time by Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren in calling for an increase to the short-term federal funds rate. Three members of the committee favored raising rates by 0.25 percent this month.
Wednesday’s FOMC announcement showed that the case for a rate hike has increased.
The Fed also projected a less aggressive rise in interest rates next year and in 2018, and cut its longer-run interest rate forecast to 2.9 percent from 3.0 percent. They now expect rates to hit 1.1 percent at the end of 2017, down from a forecast of 1.6 percent in June.
The Standard & Poor’s 500 index rose 23 points, or 1.1 percent, to 2,163. After all, back in December the Fed had signaled it was likely to raise rates a quarter of a point four times in 2016.
Stocks closed solidly higher on the news.
“It provided a bit of a lift to gold as well as well as other assets, but certainly we are going to be more or less on hold until we see the Fed statement later”, analyst Tom Kendall at ICBC Standard Bank in London said. He believes that the anomalies in the May payrolls number was miscommunicated and suggests the Fed could still have hiked in the summer despite the shock result of the United Kingdom referendum on its European Union membership.
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The Bank of Japan said it would target interest rates on government bonds as the latest measure to achieve its elusive inflation target. The median forecaster on the board now expects the USA economy to grow 1.8 percent this year, down from 2 percent in June, and the unemployment rate to finish the year at 4.8 percent.
