The Fed expects growth will remain tepid for the next three years, the latest evidence it is pessimistic about the economy’s potential to expand more quickly.
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“The case for an increase in the federal funds rate has strengthened”, the USA central bank said in a statement following a two-day policy meeting. That said, Yellen defended the Fed’s independence again Wednesday, saying its decisions are made without political considerations. She commented that there was scope to let the economy run a little longer than expected given these two factors.
In fact, Yellen even suggested that she’s not yet sure how long the Federal Reserve can continue to avoid pulling the trigger on a rate increase.
Adding some support to the Fed’s plans for at least one hike this year was a report that showed the number of Americans applying for unemployment last week fell to a two-month low. The eurozone economy is growing slowly, but inflation remains well far below the ECB’s 2 percent annual target.
In her press conference Fed chair, Yellen’s initial statement was similar with the Fed statement issued earlier.
Markets now forecast a December rate hike is the most likely next contender.
Since lots of consumer and business rates are linked to the federal funds rate, holding steady means auto loans, many variable rate mortgage loans, the prime rate for business lenders – all those rates won’t go up either.
Currently, only 14.5 percent of market participants foresee a rate increase at the FOMC’s November meeting, while the majority – nearly 60 percent – anticipate the Fed moving in December, according to the CME Group FedWatch tool.
The Fed kept its target rate for overnight lending between banks in a range of 0.25 percent to 0.50 percent, where it has been since it hiked rates in December for the first time in almost a decade.
“The Fed left rates on hold but open warfare has now broken out”, quipped Ian Shepherdson of Pantheon Macroeconomics. As we have seen many times in the past, it doesn’t take much to convince the Fed to postpone a rate hike.
Sentiment shifted, though, after Lael Brainard, a Fed board member and Yellen ally, laid out the case for delaying a resumption of rate increases for now.
Taye Shim, an analyst with the Jakarta-based Daewoo Securities, said in a note that the Fed decision to hold rates, coupled with monetary easing by the Bank of Japan, should lift short-term uncertainties and lead to a relief rally.
On the other side of the Atlantic, the USA initial jobless claims for the week ended September 17 are due out at 13:30 BST, followed by the nation’s existing home sales for August at 15:00 BST. A manufacturing gauge slid back into recession territory. There’s also evidence that threats to US growth from global instability have eased. Inflation remains below the United States central bank’s target of 2 per cent and members saw room for improvement in the labour market.
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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.
