US Fed puts December rate hike firmly on the agenda

29 Oct 2015 | Author: | No comments yet »

Fed keeps rate at record low but will consider December hike.

New Delhi: The Federal Reserve on Wednesday kept interest rates unchanged at a record low of near-zero, but raised the likelihood of a rate hike in December by dropping previous warnings about the fragility of the global economy.

Following a two-day meeting in Washington, Fed policymakers voted to leave rates at 0-0.25%, where they have been for the seven years since the financial crisis, reported the Guardian . Fed officials explicitly said they might raise short-term interest rates in December, pushing back against investors who have bet that the central bank wouldn’t move this year, reported the Wall Street Journal . A statement the Fed issued Wednesday said it would monitor job growth and inflation to determine “whether it will be appropriate to raise the target range” for its benchmark rate at its next meeting. Before the Fed released its policy statement Wednesday, traders in futures markets placed about a 1-in-3 probability of a Fed rate increase this year; after the release, that probability rose to almost 1-in-2.

They removed a sentence from their September statement that had warned of global weakness stemming from a sharper-than-expected slowdown in China. “The Fed sent its clearest signal yet that, pending decent data, it has the December meeting in its sights for the first rate hike,” said Michael Feroli, an economist at JPMorgan Chase and a former Fed staffer. While the committee voted to keep rates unchanged, it omitted previously voiced concerns over the negative impact of China’s weakness on the US economy. Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expects a December rate increase if the job reports for October and November improve over September, when hiring slowed.

In its latest statement, this language was adjusted to state that the committee was merely “monitoring global economic and financial developments”. While many Fed officials have signaled a desire to raise rates before year’s end, some tepid economic reports in recent weeks had led some analysts to predict no hike until 2016. And with all of this jawboning going on, there has been a growing drumbeat of criticism from those who think the Fed’s push to explain itself has merely added to confusion for markets, added the report.

This is a greater specificity than in any prior statements and is a signal that a December Liftoff is still very much on the table.” Peter Boockvar of The Lindsey Group thinks the Fed has not committed to a December hike with its latest policy statement. On the other hand, the Fed said in its statement Wednesday that consumer spending and business investment have been rising “at solid rates” and that the housing market has improved further. Its action rocked markets and escalated fears that the world’s second-largest economy was weaker than thought and could derail growth in the United States. Also, inflation has fallen further from the 2 percent target because of falling energy prices and a stronger dollar, which lowers the cost of imports.

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