The Federal Reserve kept its key interest rate unchanged Wednesday but signaled it is likely to raise it later this year. “The dissenting members of the Fed Board are likely concerned about being ahead of the inflation curve as well as financial instability, particularly since prolonged low interest rates might be creating asset pricing bubbles in major markets, such as in the commercial real estate market”, he noted.
Advertisement
Fed Chair Janet Yellen, speaking after the central bank’s latest policy statement, said US growth was looking stronger and rate increases would be needed to keep the economy from overheating and fueling high inflation. But it noted that business investment remains soft and inflation too low and that it wants to see further improvement in the job market.
“It’s a sign of how well the Fed’s statement was received last night that the FTSE, climbing around one per cent, has managed to cross 6900 for the first time in a fortnight despite the pound seeing its own 0.5 per cent increase against the dollar”.
The decision suggests the Fed believes the US 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.
“The focus of the market is shifting from the Fed rate decision to the near-term outlook for rate hikes”, HSBC’s James Steel said.
Stock prices rose in the hour after the Fed issued its statement and during a news conference by Chair Janet Yellen that laid out her case for holding off on a rate hike for now.
Since lots of consumer and business rates are linked to the federal funds rate, holding steady means vehicle loans, many variable rate mortgage loans, the prime rate for business lenders – all those rates won’t go up either.
Yellen identified at least one such risk- the Fed is concerned about a possible bubble in commercial real-estate. Seoul’s Kospi added 0.9 percent to 2,017.94 and Sydney’s S&P-ASX 200 gained 0.4 percent to 5,497.40. Yellen even said the case for a rate increase has “strengthened”. Murphy Oil jumped 4 percent. It also projected a less aggressive rise in rates next year and in 2018, and cut its longer-run interest rate forecast to 2.9 per cent from 3.0 per cent. Inflation has remained below that level for more than three years.
While the FOMC does have a meeting at the beginning of November scheduled, it is regarded as highly unlikely it would take action within a few days of an election, meaning December is now considered the earlier point a raise could come.
Fed officials also indicated that they still expect interest rates to rise by year’s end, although not as quickly as they had previously expected. It promised to keep expanding the nation’s money supply until inflation surges above 2 percent for an unspecified time.
The majority of investors are now pricing in the likelihood of a December rate hike.
Therefore, rate hike may not be coming anytime soon and this surely helps the emerging markets like India is stabilizing.
Advertisement
Elsewhere, copper rallied to a six-week high despite worries about slow demand growth, supported by the Fed’s policy. They said they expected Japan’s central bank to eventually slash its policy rate further.
