The US Federal Reserve held rates again

The Federal Reserve on Wednesday left its benchmark fed funds rate unchanged, as expected, and said the case for a rate hike continued to strengthen.

Most economists had expected that the Federal Open Markets Committee (FOMC) would leave the federal funds rate unchanged. That rate ends up influencing other rates on things like mortgages, and has been in a range of 0.25%-0.50% since last December.

Two FOMC members thought the committee should have voted to raise rates at its two-day meeting this week.

After several years of super-low rates to support the economy, the Fed decided to normalize things slowly, using economic data as a guide.

On its two mandates — the labour market and inflation — the data show progress since the first rate hike, and the Fed is ready to raise rates again.

However, the Fed does not usually make big policy changes when there’s no scheduled press conference — and there’s none on Wednesday. Also, a rate hike could be too politically charged within a week of the election.

And so, most bets are on December. Fed fund futures reflect these wagers among traders, and implied a 60% chance of a hike next month ahead of the Fed’s statement, versus a 15% chance for a November hike.

But the guidance for next month was less explicit than it was a year ago. When the Fed tried to steer market expectations in November 2015, it said it may be appropriate to start normalizing monetary policy “at the next meeting.”

That drew some criticism of so-called calendar-based guidance, which departs from the Fed’s reliance on data.

Here’s the full statement:

Information received since the Federal Open Market Committee met in September indicates that the labour market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 per cent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market conditions will strengthen somewhat further. Inflation is expected to rise to 2 per cent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labour market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 per cent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labour market conditions and a return to 2 per cent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action were: Esther L. George and Loretta J. Mester, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 per cent.

More to come…

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