Highlighting a growing split on the Federal Open Market Committee, three regional Fed presidents dissented from the decision: Esther George of the Kansas City Fed, Loretta Mester of the Cleveland Fed and Eric Rosengren of the Boston Fed.
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According to the news release, the decision to keep interest rates low was supported by seven members of the committee including Chairman Janet L. Yellen.
Yellen noted historically low rates haven’t caused the economy to overheat as some analysts feared they would.
Last December, the Fed signaled that four rate increases were likely in 2016, but that was scaled back in March due to a global growth slowdown, financial market volatility and concerns about tepid US inflation. It raised rates a year ago for the first time in almost a decade. “The Fed also lowered its growth and inflation forecasts, which has tempered interest rate hike expectations”. The Hang Seng of Hong Kong gained 0.6 percent and South Korea’s Kospi rose 0.5 percent. Officials indicated they foresee one rate hike before the end of 2016.
Sentiment shifted, though, after Lael Brainard, a board member and Yellen ally, laid out the case for delaying a resumption of rate increases for now. Doves tend to be wary of raising rates quickly for fear for undermining growth. “The economy has a little more room to run than might have previously been thought”. Homebuilders had slumped Tuesday after the USA government said construction of new homes slowed down in August. A manufacturing gauge slid back into recession territory.
The statement commented that the labour market had improved further and consumer spending was firm, while investment levels remained disappointing. US shoppers retreated in August to depress retail sales after four straight monthly gains.
Steady job gains have pulled discouraged workers back into the job market and yet inflation remains below the two per cent target rate. The new chief, Urjit Patel, is under a lot of pressure to do that. “The bigger picture for gold is that we are in a low interest rate world”.
In a statement from the FOMC, the central bank expressed confidence in USA economic growth, but not enough to make a move this month. The central bank is not expecting to hit its inflation target of 2.0% until 2018, unchanged from the previous outlook.
“Moreover, a number of consumption-related data points, including retail sales, have also been weak as of late, posing questions on the ability of consumers to continue driving growth going forward”. The United Kingdom’s economy is holding up better than expected after British voters voted in June to leave the European Union. That view appeared to be backed by a resilient yen, underpinned by doubts over whether the Bank of Japan’s policy overhaul will be enough to generate inflation.
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“It’s a very good thing that the [Fed] is not a body that suffers from group think”, Yellen said, referring to the concept of everyone in a group believing the same thing.
