Overall, the main takeaway from the September FOMC meeting was that the Fed still sees a rate hike likely occurring by the end of the year, but as always, this will be entirely dependent upon further economic data going forward.
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“We’re generally pleased with how the USA economy is doing”, Yellen said in a press conference following the conclusion of the Federal Open Market Committee’s two-day meeting in Washington. At their most recent policy meeting in late July, the Fed’s policymakers noted that near-term risks to the economy had diminished.
Fed Chair Janet Yellen was among the seven who voted to wait.
“…but with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives”.
Speaking to reporters after the meeting, Yellen sought to downplay the divisions.
The Federal Reserve had a cap on long-term yields back in the 1940s, as part of the US government’s efforts to keep down wartime and postwar debt financing. The Fed said the USA job market has strengthened and economic activity has picked up but business investment is soft and inflation too low. Pointing to the “roughly balanced” phrasing, she said, “this statement basically increased the chances of a December rate hike”. Analysts think that the Fed will hike rates by a quarter-point at its last meeting in December.
Fed Chair Janet Yellen had a simple explanation for why the Fed didn’t raise rates: the economy can still grow without hurting itself.
The decision suggests the Fed believes the U.S. economy has sailed safely through headwinds that anxious officials earlier this year, including possible damage from Great Britain’s vote to exit the European Union. Also significantly more hawkish was the fact that there was a higher-than-usual degree of dissension among voting members, the most since 2014, with three dissenters voting to raise rates: Esther George, Loretta Mester, and Eric Rosengren.
The Fed’s statement Wednesday was issued hours after the Bank of Japan, struggling to rejuvenate an ailing economy, set a more ambitious goal for raising inflation and announced steps meant to raise the profitability of financial firms.
“The highly-unusual 7-3 FOMC vote speaks to the complexity facing the Fed operating in a prolonged period of highly unbalanced policy mix”, Allianz’s Mohamed El-Erian said. But she did not appear concerned by the unusual number of dissents.
Analysts and investors had not expected a rate increase Wednesday.
Global stocks rose Thursday after the US and Japanese central banks left interest rates unchanged.
The markets had widely expected that the Fed would keep its key lending rates unchanged.
Yellen said politics had nothing to do with Wednesday’s decision and indicated the Fed could raise the rate in November.
Yellen also declined to comment on recent statements by Republican presidential nominee Donald Trump that she was holding the rate low to help President Obama and Democrats. A slight majority expected a hike at the December meeting, with 45.6% foreseeing a 0.5-0.75% target rate and 12.4% expecting something higher. Economic projections released along with the statement show that members cut economic growth estimates for 2016 to 1.8% from a projection of 2% in June. Fed officials say they are keeping rates low to aid the economy, which they argue continues to need support, by making loans, such as mortgages, cheaper. The median of Fed forecasts on Wednesday pointed to just one increase this year, with the year-end prediction for the target range centred on 0.625 per cent.
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Policymakers also signaled the rate would rise more slowly over the next few years than they had forecast in June. Amgen lost 46 cents to $172.92 while Alexion Pharmaceuticals gave up $2.10, or 1.6 percent, to $129.63. Fed policymakers expect growth will be just 1.8 percent that year, after mediocre growth of 2 percent in 2017 and 2018.
