Fed holds US interest rates again but hints at possible increase in December

Policymakers will meet again on 16 December when markets will be braced for the prospect of the first rate rise since 2006

Andrew Dewson,Michael Bow
Thursday 29 October 2015 01:46 GMT
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The new chair of the Federal Reserve Janet Yellen
The new chair of the Federal Reserve Janet Yellen

The Federal Reserve has opened up the possibility of a December US rate hike after issuing an unexpectedly hawkish outlook for the economy.

The central bank’s rate-setting committee said it had seen a rise in US household spending and dropped previous warnings about global financial risks threatening the economy, opening the door to a December increase.

With no meeting scheduled for November, policymakers will meet again on 16 December when markets will be braced for the prospect of the first rate rise since 2006.

In its post-meeting statement the Fed again noted international volatility. However, the tone of the statement was notably calmer than September’s, which came on the back of a volatile August in global equity markets.

The rate-setting Federal Open Market Committee also emphasised its desire to see inflation rise to its 2 per cent target before raising rates, as it has done at every meeting since last December.

The committee noted that it expected inflation to hit its target over the “medium term … as the labour market improves further and the transitory effects of declines in energy prices and import prices dissipates”. Although US employment has remained encouraging, it is yet to manifest itself in terms of higher wages and subsequent inflationary pressure.

Despite the Fed’s apparent willingness to raise rates, many observers believe that increasing too early could jeopardise what is widely still seen as a fragile recovery.

Growth is unlikely to rise higher than 2 per cent over the year despite the US economy’s relative strength and stability, plus the partial recovery in US stock prices following August’s losses. Other key economic indicators, including consumer confidence and business investment, remain uninspiring.

“Despite the fact that many people see raising interest rates as a positive sign for the economy, the data simply doesn’t support the hawks right now,” said Bill Waite, managing director at the New York-based economics consultancy Semnia. “If you just let the numbers guide you, you probably don’t raise rates next time either and under [Fed chairman Janet] Yellen the Fed has been characterised by its caution. However, there is more to economics than numbers, so there is still a chance the Fed will move next month.”

News that rates would be left unchanged came as a surprise to very few economists. However, for the second month in succession the vote was not unanimous – Jeffrey Lacker, the chairman of the Federal Reserve Bank of Richmond, was again the lone dissenter from the majority decision, pushing for a quarter point rise.

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