The central bank’s statement and a press conference led by Fed Chair Janet Yellen will be the focus.
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Whenever the market falters, the central banks step in either via further monetary easing as in the case of the European Central Bank (ECB) and the Bank of Japan (BoJ) or by pushing back rate hikes into the future as in the case of Federal Reserve.
Yellen stressed that the US economy is progressing, close to a sustainable unemployment rate below 5 percent and in time the inflation rate is expected to rise to the Fed’s 2 percent goal. Major stock averages closed up around 1 percent for the day.
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.
Earlier on Wednesday, the BOJ set a new goal of keeping the 10-year Japanese bond yield at around its current level near zero percent, a move to aid banks squeezed by negative-interest rates, while preventing bond yields from rising high enough to reduce private-sector borrowing. “The economy has a little more room to run than might have previously been thought”.
“We are also expecting that officials will not want to tighten at the 1-2 November meeting given its close proximity to election day”, said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
As for growth, the committee now foresees full-year gross domestic product of just 1.8%, a decrease from the 2% estimate in June. As with previous decisions, sub-2 percent inflation appears to be the main contributing factor. “Of course it is good news for the financial markets in the short term, but the market has expected this and the interest rate risk hasn’t gone away”.
Yellen said the differences inside the FOMC mainly came down to the timing of rate increases, not to whether they should be carried out.
But it is worth noting that three members of the committee, Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren, voted against the decision, preferring to raise the federal funds rate to 0.50% to 0.75% at this meeting.
US Federal Reserve officials lowered their expectations for rate hikes in the years ahead Wednesday but teed up a likely move before the end of 2016.
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Although the Fed has opted to keep rates on hold, the announcement revealed there are divisions among the policymakers about what to do. While job creation continues at a “solid pace” and unemployment remains at 4.9%, where it was in January, 6.1 million people were working part-time but would like to have full-time jobs, a figure higher than the Fed would like, said Yellen. They believed that the Fed, starting with a late-August speech by Yellen in Jackson Hole, Wyoming, was preparing investors for an imminent increase. But that likelihood has faded as recent economic reports have turned out weaker than expected.
