“Most people were expecting some version of this, the idea that they weren’t actually going to hike rates but they didn’t want the notion that the Fed is never going to hike”, said Lewis Alexander, the chief US economist at Nomura.
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In the USA bond market, yields fell as the Fed lowered its projection for interest rate levels needed to support expansion.
The Federal Reserve left interest rates unchanged Wednesday but strongly signaled it could still tighten monetary policy by the end of this year as the labor market improved further.
It’s worth noting, however, 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.
After not making a rate hike at its last six meetings, the bank’s credibility is under scrutiny after investors and experts anticipated as much as four rate hikes in 2016.
For the first time this year, the Fed concluded that “near-term risks to the economic outlook appear roughly balanced”.
Stock prices rose after the Fed issued its statement and extended their gains during a news conference by Chair Janet Yellen in which she laid out her case for holding off on a rate hike for now.
The Fed will not raise rates at its November meeting, Faucher predicted, because it will want to avoid taking any influence on the presidential election. What investors wanted to know was when the Fed might lift rates.
The decision has also highlighted the divisions within the Federal Reserve’s decision-makers about when rates should be increased. “I think it more represents a softening stance towards banks and other financial institutions likely due to concerns and backlash over profitability and financial stability”, Yeo said. Among the reasons cited, the Fed said that growth of economic activity had picked up from the modest pace seen in the first half of the year and that consumer spending remained relatively strong.
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“The build-up to Wednesday was large, with lots of anticipation, but everyone kind of walked away scratching their heads”, said Bart Wakabayashi, head of Hong Kong FX sales at State Street Global Markets. There was still a pledge to expand monetary policy until inflation is stable above the 2% target. 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. The Fed’s statement implied that the economy is getting closer to full employment, as it stated that labour market conditions will strengthen “somewhat” further. The central bank set a cap on 10-year bond yields and vowed to overshoot its 2 per cent inflation target as it seeks to escape from its low-inflation rut. The commitment to pushing inflation higher was, therefore, strengthened given the target of a rate above 2%.
