With global economy slowing and deflationary trends persisting, the US Federal Reserve on Wednesday left interest rates unchanged but asserted that it may tighten in December, leaving a window of opportunity for a few central banks to ease their stance further in remaining months of 2015. And in a nod to recent weaker data, policymakers said in their statement that the pace of job gains had slowed – an indication that they may be concerned about the pace of hiring.
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This was modified on Wednesday to: “The committee continues to see the risks to the outlook for economic activity and the labor market as almost balanced but is monitoring global economic and financial developments”.
The Fed is still looking to see “some” further improvement in the labor market and “reasonable” confidence that inflation is moving back to target before it starts raising rates, CIBC said.
The USA central bank made the announcement Wednesday at the end of its two-day meeting.
Even so, forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase to the BOE’s 0.5 percent official bank rate won’t come until after December 2016.
In recent weeks, investors had bet that the USA central bank would delay its first rate hike in almost a decade to next year due to weakness in the global economy and its impact on the United States.
Still, the Fed noted that the economy is expanding only modestly.
Capital Economics forecasts the Fed funds rate might increase to around 2 per cent in 2016 and 3.5 per cent in 2017. Before Wednesday’s meeting, financial markets saw virtually no chance it would raise rates this week and only a 34% chance of such a move in December. Last month, too, the Fed kept rates on hold despite much speculation about imminent “lift-off”.
For those looking to parse the statement for indications about when a rate hike would happen, the latest Fed language offered little.
But the policy statement showed only one dissent in the 10-person vote, from a policy hawk, Jeffrey Lacker, who was already pressing for an immediate rate hike in September.
The USA dollar rose sharply on the news and yields for US government debt soared in anticipation of higher rates.
Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports, the FOMC said.
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However, the statement accompanying the Fed’s decision, which tends to change only slowly from meeting to meeting, was more hawkish than expected.
