Thursday, 28 July 2016

Fed Leaves Door Open to Move as Soon as September

In World Economy News 28/07/2016

The Federal Reserve upgraded its assessment of the economy’s recent performance and said near-term risks to the outlook have diminished, effectively leaving the door open to raise rates later this year, possibly as early as September.
Nine of 10 members of the Fed’s policy-making committee voted to leave the benchmark federal-funds rate unchanged at between 0.25% and 0.5%, but they offered a more upbeat description of the labor market and other sectors of the economy.
The labor market has “strengthened,” the Federal Open Market Committee said after its two-day meeting. That was brighter than the FOMC’s assessment six weeks ago, when the central bank said the pace of improvement in jobs growth had “slowed.” The pace of hiring bounced back in June to a gain of 287,000 jobs, from just 11,000 in May. Moreover, officials described household spending as having been “growing strongly,” and economic activity as expanding at “a moderate rate.” That marked a mild upgrade from June, when the Fed said household spending had strengthened and economic activity appeared to have picked up.
“Near-term risks to the economic outlook have diminished,” Fed officials said, another hint that they are leaning toward raising short-term rates in the months ahead. The Fed’s assessment of risks is a potential indicator of where it is leaning on policy. When it sees risks tilted to the downside, it keeps rates on hold or lowers them. The Fed was silent on risks at the last two meetings. By saying risks have diminished, it appeared to be indicating a rate increase is possible soon, though not certain.
The statement suggested officials have become less concerned about the economic outlook than they were in June, when the weak May jobs report, slow first-quarter growth and a looming vote by the U.K. on whether to stay in the European Union gave them trepidation about the outlook and whether to raise short-term rates.
The Fed’s decision on whether and when to raise short-term interest rates will depend on the flow of economic data in the weeks ahead. The statement Wednesday effectively left the Fed’s options open for its Sept. 20-21 gathering.
Before the Fed released its statement, traders in futures markets put a nearly 21% probability on a rate increase at the Fed’s September meeting and a nearly 50% probability of at least one move by the time of its December gathering.
Officials are still watching developments abroad for new threats to the outlook. As in June, the Fed said the central bank would “closely monitor inflation indicators and global economic and financial developments,” a sign that officials aren’t sure threats to U.S. growth have dissipated.
Since Fed officials last met, the U.K. unexpectedly voted to leave the EU, an event that Fed Chairwoman Janet Yellen warned ahead of time “could have significant economic repercussions.”
Spillovers to the U.S. have been limited so far. Financial markets largely shrugged off the immediate reaction to Brexit, with U.S. indexes hitting highs in recent weeks. The Fed’s assessment of global risks on Wednesday indicated officials’ concerns about Brexit-related financial strains had diminished in the short term; however, they still see lingering threats from Europe in the medium to longer run. China’s economic slowdown has been another source of angst inside the central bank.
If job growth and other key measures of the domestic economy’s health continue to improve between now and the September FOMC meeting, the central bank could follow through with its long-held plans to increase borrowing costs this year.
Wednesday’s statement turns the focus toward Ms. Yellen’s Aug. 26 speech in Jackson Hole, Wyo., when the leader could signal where rates are headed.
Though the job market hit a rough patch in May, data since the Fed’s June 14-15 meeting have been more upbeat. The committee said Wednesday it still expects “gradual” adjustments in monetary policy.
The central bank in December lifted the fed-funds rate a quarter percentage point after holding it near zero for seven years and laid out plans to push rates higher over the course of 2016.
But seven months into the year, the Fed’s plans have been delayed by weak growth in the first quarter, labor-market volatility in the spring, and uncertainty surrounding the Brexit vote.
Federal Reserve Bank of Kansas City President Esther George voted against the committee’s action on Wednesday because she preferred to raise rates immediately. Ms. George dissented at the March and April meetings, too.

Source: Dow Jones