US Federal Reserve holds interests rates near zero

US interest rates have been at historic lows since the financial crisis in 2007

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The US Federal Reserve voted to keep the cost of borrowing at virtually zero last night as its rate-setting committee concluded concerns about the global outlook outweighed signs the domestic recovery is gathering strength.

At the end of its two-day meeting, the central bank’s  Federal Open Markets Committee (FOMC) was split for the first time this year, voting 9-1 to maintain its 0 to 0.25 per cent interest rate target. Jeffrey Lacker, at the Richmond Reserve Bank, voted to raise rates by 0.25 per cent.

US interest rates have been at historic lows since the financial crisis in 2007, which has helped fuel a six-year bull market on Wall Street. But rather than hailing the Fed’s decision not to end this era of easy money last night, stocks fell amid signals a rates rise this year is still possible, with the benchmark Dow Jones index closing down 0.4 per cent.

At a scheduled press conference after the decision, the Fed’s chair Janet Yellen noted the fact that the US job market has improved and inflation is still below the central bank’s target but warned that the outlook abroad had become more unstable of late.

She added: “An argument can be made for a rise in interest rates at this time but the committee decided to wait for more evidence that inflation will rise to 2 per cent in the medium term. I do not want to overplay these developments, which have not fundamentally altered our outlook.”

The move, or lack thereof, came on the back of 10 months of threats to hike the cost of borrowing. Ms Yellen first raised the prospect of higher interest rates in December 2014, although every meeting since then has expressed enough caution to prevent the Fed from acting.

Economists and Fed-watchers had been split on whether the central bank would raise rates this month, and many had correctly suggested it would hold off in light of last month’s turmoil on global stock markets and concern over growth in China. Many feel that raising rates too soon could jeopardise the US recovery, especially if a slowdown overseas sees the dollar strengthen, hitting US exporters.

However, continued encouraging news on US employment, low gasoline prices and the publication of several upbeat economic indicators led other economists to believe that the Fed would act to raise rates this month.

The statement failed to mention China by name but did mention “global economic and financial developments”, a clear indication the recent turmoil has spooked the FOMC. 

The statement also included the usual cautious optimism, the hallmark of Ms Yellen’s tenure so far, noting that the committee expects the US economy to continue to improve. The central bank also revised up its growth forecasts for 2015, predicting the US economy will now expand by 2 to 2.3 per cent (from 1.8 to 2 per cent)

 

While the majority of Fed policymakers still expect a rate hike at its October or December meeting, the money markets are increasingly expected it may wait until 2016. Future traders were last night pricing in a 56 per cent chance of a rise by January.

Bill Waite, at the economics consultancy Semnia, said. “I remain of the opinion that the earliest we will see a rate hike is the end of this year.”

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