Fed improves economic outlook but defers on rate hike

The Federal Open Market Committee (FOMC), the policy arm of the Federal Reserve, was 9-1, as Richmond Fed President Jeffrey Lacker dissented for the second consecutive meeting, who supported to raise interest rate by 25 basis points at this meeting.

Although Fed chairwoman Janet Yellen indicated she was less dubious about global volatility than she was in her September announcement, she iterated the Fed would hike rates when employment picks up and inflation moves closer to 2%. In its closely scrutinized policy statement Wednesday the Fed gave a more positive assessment of the US economy and downgraded its fears that global market tumult and worldwide developments would have an appreciable negative impact on growth at home.

The committee wants to be “reasonably certain” that the inflation outlook will improve before raising rates, the statement said.

Investors had expected the Fed to remain put on rates, but the overt reference to December came as a surprise.

And then, after the Federal Reserve announced it was leaving interest rates unchanged as it outlined the conditions for a December hike, the indexes plunged into the red.

None of which means the Fed is certain to pull the interest-rate trigger in mid-December. While the FOMC noted that household spending and business fixed investment had increased moderately over the previous two months, it expressed concern that a slowdown in the global economy had placed significant downward pressure on inflation.

The euro-US dollar currency pair fell 1.2% on October 28, 2015, as the Fed delayed a rate hike and stated that it’s open to considering a rate hike in December.

The Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. “Fears about a collapse in China’s economy have faded a little in recent weeks and United States stock markets have now largely recovered the losses sustained during the slump in late August”, Gambarini said.

“We could see a double whammy, where the RBNZ cuts and the Fed hikes rates”, said Tim Kelleher, head of institutional sales at ASB Bank.

Futures markets show a 46% chance that the Fed will lift its benchmark by year-end, up from 37% before the statement’s release.