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Monday, 26 September 2016 13:23

Fed Leaves Rates Unchanged, Signals 2016 Hike Still Likely Featured

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A divided Federal Reserve
left its policy rate unchanged for a
sixth straight meeting, saying it
would wait for more evidence of
progress toward its goals, while
projecting that an increase is still
likely by year-end.
“Near-term risks to the economic
outlook appear roughly balanced,”
the Federal Open Market
Committee said in its statement
Wednesday after a two-day meeting
in Washington. “The Committee
judges that the case for an
increase in the federal funds rate
has strengthened but decided, for
the time being, to wait for further
evidence of continued progress toward
its objectives.”
The decision extends U.S.
central bankers’ run of getting cold
feet amid risks from abroad and inconsistent
signs of economic
strength. Now the focus may shift
to December as the Fed’s likely last
chance to raise interest rates in
2016 -- a move that depends on
how the economy, inflation and
markets fare in the months surrounding
a contentious presidential
election.
“The statement is much more
hawkish than I thought it would
be,” said Stephen Stanley, chief
economist at Amherst Pierpont Securities
LLC in New York, who
said he expects a rate increase in
December. “That just tells you they
are revving up the engines.”
Three officials, the most since December
2014, dissented in favor of
a quarter-point hike.Esther George, president of the
Kansas City Fed, voted against the
decision for a second straight meeting.
She was joined by Cleveland
Fed President Loretta Mester -- in
her first dissent -- and Eric Rosengren,
head of the Boston Fed,
whose previous dissents called for
easier policy.
Policy makers see two rate
hikes next year, down from their
June median projection of three.
The Fed said that the labor market
will “strengthen somewhat further,”
adding the qualifier “somewhat
further” to similar language
from the July statement.
“Although the unemployment rate
is little changed in recent months,
job gains have been solid, on average,”
the Fed said in its statement.
“Household spending has been
growing strongly but business
fixed investment has remained
soft.”
The target range for the benchmark
federal funds rate remains at 0.25
percent to 0.5 percent, where it’s
been since a quarter-point increase
in December 2015 that ended
seven years of near-zero rates.
The Fed repeated that it “continues
to closely monitor inflation indicators
and global economic and financial
developments.”
Gradual Pace
The FOMC reiterated that borrowing
costs will probably rise at an
“only gradual” pace. Policy makers
also reiterated that they expect inflation
to rise to their 2 percent
goal over the medium term.
Because November’s FOMC meeting
comes within a week of the
U.S. presidential election and isn’t
followed by a press conference
with Chair Janet Yellen, economists
have viewed the Fed’s December
meeting as a more likely
candidate for an increase.
The latest decision could embolden
Republican presidential nominee
Donald Trump to unleash additional
attacks on Yellen. The billionaire
businessman said last
week that the Fed “is being totally
controlled politically” and might
stand pat on rates for the rest of
year.
Yellen, a former economics professor
at the University of California
at Berkeley, was appointed Fed
chair by President Barack Obama
and served as President
Bill Clinton’s
top economic adviser.
The decision comes
as Fed officials become
more convinced
that the
economy is experiencing
a new normal.
Long-Term Rate
Policy makers scaled
back their median
projection of the
long-term interest
rate to 2.9 percent
from 3 percent in
June. The estimate
shows how high officials
think rates can
climb, so its downgrade suggests a
shallower hiking cycle.
Fed officials also cut their median
growth projection for 2016 to 1.8
percent from 2 percent, mirroring
the drop in the longer-run forecast,
based on median estimates. Inflation
is projected at 1.3 percent in
the fourth quarter, down from a
forecast of 1.4 percent in June.
Policy makers again projected that
inflation will reach the 2 percent
target in 2018.
Most economists in a Bloomberg
survey had expected the committee
to stay on hold, assigning just a 15
percent chance of a hike this
month. Fed watchers saw a 54 percent
probability that the Fed will
raise rates at its December 13-14
meeting.
Yellen is scheduled to hold a press
conference at 2:30 p.m. in Washington.
It will be her first public remarks
since a speech last month,
when she said that the case for an
interest-rate increase “has strengthened
in recent months.”
Payroll Gains
Nonfarm payrolls have climbed by
182,000 jobs on average so far this
year, although the most recent report
showed a cooling to 151,000
job gains along with moderating
wage increases. Other figures have
shown declines in August retail
sales and industrial production, as
well as drops in sentiment at service
companies and manufacturers.
Inflation is still running below the
Fed’s 2 percent goal. After picking
up earlier in the year, annual gains
in the headline personal consumption
expenditures price index
slowed to 0.8 percent in July. Core
inflation, which excludes food and
fuel costs, is firmer though still undershooting
at 1.6 percent.
Meanwhile, inflation expectations
have stayed relatively low. A gauge
of market-based expectations
watched by the Fed is projecting a
pace of price gains of about 1.5
percent in the period five to 10
years out.
The Fed repeated on Wednesday
that “market-based measures of inflation
compensation remain low.”

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