“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation”.
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The Fed’s move followed the Bank of Japan’s announcement Wednesday that it left unchanged its negative interest rate on certain commercial-bank deposits and said it would introduce a 10-year interest-rate target.
“The committee judges that the case for an increase in the federal funds rate has strengthened, but decided, for the time being, to wait for further evidence of continued progress toward its objectives”, read the Fed statement. Economists believe policy makers would avoid a rate hike in November in part because the meeting falls just days before the United States presidential election.
Yet a move later this year appears increasingly likely.
At the time, it forecast four additional rate increases this year. This is an unusually large number, which indicates that policy board is split. Three FOMC members – Esther George, Loretta Mester and Eric Rosengren – dissented, preferring to raise rates now. That’s where it’s been since last December when the Fed lifted the rate a quarter of a point from near zero – where it had been left for seven years as the central bank tried to support growth coming out of the Great Recession.
The statement, however, was more bullish than previous versions. Look to see whether it bows to signs of sluggish expansion by forecasting that the economy will fail to grow even 2 percent this year.
In commodity markets, gold traded down 0.2 percent at $1,333.20 an ounce XAU=, having climbed 1.7 percent as the USA dollar declined on Wednesday. Some of the headwinds to growth are temporary, such as sluggish business stockpiling. Although the unemployment rate is little changed in recent months, job gains have been solid.
“The Fed is very clearly making a stronger statement that it could be raising rates in December”, says Michael Merlin, managing director of wealth management and private wealth advisor of Hansberger & Merlin at Morgan Stanley, which has an office in Buckhead. Fed officials said they expected that economic growth would not exceed 2 percent over the next three years. That was down from its March estimate that the rate would be at 3 percent after 2018.
The policymakers also modestly downgraded their economic outlook. At that time, the jobless rate was at 5 percent. This brings up the possibility of a rate hike at the November FOMC meeting (November 2).
Shorter-dated United States government debt fell while 10-year Treasuries rose, reflecting expectations that investors are toning down bets on Fed rate hikes further down the road.
But then came a spate of disappointing economic reports for August, including soft payroll gains, a sharp drop in both service-sector and manufacturing activity and listless retail sales, particularly autos.
If you are anxious about being stuck in low-rate long-term CDs as rates rise, you may want to put more focus on 5-year CDs with mild early withdrawal penalties. And inflation has inched toward the Fed’s goal.
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Overall, though, projections reflected a substantial pivot for a Fed that had anticipated a full percentage point hike in its interest rate target this year. Further resistance is seen at 1.1214 reflecting the 4-hour lows from the prior week with additional resistance at 1.1230 reflecting early August highs. For months, Fed watchers had speculated that the policymakers were preparing investors for a September rate increase.
