Chicago Fed President Charles Evans, one of the most vocal supporters of central bank stimulus, recently said he considers two rate hikes this year as “appropriate”.
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And while USA job gains were described as strong, the Fed did note that it expects inflation to remain low.
Despite strong job gains and a national unemployment rate of 4.9 per cent, Fed policymakers have previously said they would proceed cautiously in raising rates again due to the uncertainty in the world economy and a lack of inflation pressures at home.
The Fed’s policy-setting Federal Open Market Committee, as expected, left its target range on rates unchanged at 0.25-0.50 percent and removed a specific reference on the global economic risks in its policy statement.
The Fed downplayed the risks posed by “global economic and financial developments” to the USA economy, though it said it would “closely monitor” these.
Some investors did not see a bigger chance the Fed would raise rates in two months after the latest FOMC statement, citing plenty of risks that could depress USA economic growth. She wanted a quarter-point rate increase. The Fed stated that the private consumption growth moderated in spite of strong real income growth and higher consumer sentiment. That could delay interest rate hike until September, which could be too close to the 8 November presidential election.
The Fed was spooked earlier in this year by a global equities sell-off and the tightening of financial markets largely on concerns of an economic slowdown in China. Chair Janet Yellen has said that the pace of future rate increases will be dependent on United States economic data, which has been mixed of late. However, the next Fed rate hike should have more of a positive impact since it will indicate that the December rate hike wasn’t just a one-time event.
Those factors may allow the Fed to reinstate a balance of risks assessment in its statement, most likely a description of the risks to the USA economic outlook as “nearly balanced”. But if they see inflation heating up, they can raise rates to discourage borrowing, and that in turn can restrain wage and price increases.
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“The comments did not change the direction of the dollar because the two rate hikes by the Fed remain intact”, said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California. In December, the Fed estimated it would raise rates four times in 2016. The economy in the first quarter is expected to have grown at a very sluggish 1% or lower, according to several estimates. “The committee now expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen”.
