Until recently, many had thought a rate hike was likely this week. Steady job gains have pulled discouraged workers back into the job market and yet inflation remains below the two per cent target rate.
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In a statement, the FOMC said the labour market had “continued to strengthen” and economic activity had improved from the “modest pace” set in the first half.
In a passionate defense of the Fed, Yellen said the central bank is “not politically compromised” and that she was giving her personal “commitment to the American people” that she vows “to lead an institution that’s not political”. From late yesterday to today, the implied probability of a December rate hike has decreased from 60% to 59%. “However, Investors should take this with a large pinch of salt – at the end of 2015 the Fed had been expecting four rate rises this year”. Compared to December 2014 forecast, Fed is 200 basis points behind the expected curve which fuelled the rise of the dollar.
Editor’s Note: The article was updated to include comments from Fed Chair Janet Yellen.
Fed Chair Janet Yellen, speaking after the central bank’s latest policy statement, said USA growth was looking stronger and rate increases would be needed to keep the economy from overheating and fuelling high inflation.
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.
Analysts suggested that policy-makers who favour a go-slow approach to rate increases, who include Yellen, weren’t yet ready to act this week.
The betting is that she will deal with it by steering the committee to support a rate hike by year’s end. Doves tend to be wary of raising rates quickly for fear for undermining growth. Yellen said the slowdown in the global economy warranted caution. For instance, the unemployment rate has remained at 4.9 percent for the past three months, and that’s up from 4.7 percent in May.
These were signs, too, that the economy might be struggling to accelerate after three straight quarters of anemic growth.
Meanwhile, the dollar edged lower to US$1.1189 per euro after the Fed left its benchmark rate stuck at 0.25-0.50 per cent, saying it needs to see more evidence of firming of the economy.
Earlier on Wednesday, the spot gold price had also received a boost after the Bank of Japan maintained its 0.1-percent negative interest rate and overhauled its monetary stimulus programme.
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“The market has come to the conclusion that everything is fine: central banks are still there, supporting equity markets and keeping yields low, ” said Daniel Morris, an investment strategist at BNP Paribas Investment Partners. Core inflation, which excludes more volatile prices such as energy, is expected to hit 1.7 percent for this year. Until last December, the rate had been near zero.
