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US Fed sees weaker growth, lower inflation; delays rate hike
A surge in financial market volatility around the world forced the U.S. Federal Reserve to stay its hand Thursday, keeping its benchmark interest rate unchanged at near-zero.
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All of that has kept inflation extremely low.
The Fed has not increased rates since June 2006. “That’s all code for China”. The idea would be to set a floor on interest the banks charge their customers: Banks wouldn’t be willing to lend at lower rates than they’re receiving from the Fed.
In contrast to China, the U.S. economy has been seeing strong gains this year. It was the first vote against a monetary policy decision this year.
The Fed’s target interest rate, a rate at which banks lend funds to each other overnight, influences all interest rates of longer maturity throughout the economy.
The Fed’s preferred measure of inflation was most recently up just 1.2 percent, compared with 12 months earlier.
This week’s decision to yet again delay a rate hike “is the beginning of the Fed taking on board the idea that excess global capacity is playing a bigger role in determining domestic wages and prices”, said Steven Ricchiuto, chief economist with Mizuho Securities USA. The median of the Fed’s long-term forecast was lowered to 3.5% from 3.8% in June. The change takes into account the further rise in the value of the dollar, which makes imports cheaper, and a recent drop in oil prices. However, its forecasts for GDP growth in 2016 and 2017 were downgraded. The dollar fell against a basket of currencies after the release of the statement, trading about 1 percent lower against the euro.
U.S. money market futures hardly moved, still pricing in about one-in-four chance of a rate hike on Thursday.
Yellen added that 2% is not a ceiling on its inflation target, and so overall, Yellen seems more comfortable with letting inflation run “too hot” than moving interest rates higher before it really picks up.
The anxiety that gripped investors stemmed in part from concern that once the Fed starts raising its key rate, other rates – for mortgages, car loans, business borrowing – will eventually rise.
Homebuilders are keeping a close eye on interest rates, as some fear an increase would deter potential buyers from making the move from renting to owning – thus reducing the number of potential buyers for their new properties.
The next Fed meeting will occur in October.
The ultra-low loan rates the Fed engineered were intended to help the economy recover from the Great Recession.
Financial markets had been zigzagging with anxiety this summer as investors tried to divine whether the Fed would start phasing out the period of extraordinarily low borrowing rates it launched at a time of crisis. The Fed might pause for months after its first hike and assess the consequences before proceeding further.
That glut of dollar-denominated credit has even led some to ponder a global debt crisis spurred by ripple effects of a rate hike.
Only Lacker, who wanted to raise rates by a quarter percentage point, dissented on Thursday. Stocks tumbled.
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Borrowers and lenders all over the world had been closely watching for the announcement that came at the end of a two-day Fed meeting.