Fed hints strongly at 2016 interest rate hike

The US Federal Reserve looks likely to raise its key interest rate before the end of 2016, based on individual members' projections issued Wednesday.

The central bank balked, though, at taking immediate action, as its monetary policy committee decided to maintain very low interest rates, pending signs of higher inflation and further strengthening of the labour market.

In a statement, the Fed said that it "judges that the case for an increase in the [benchmark] federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives."

The Fed released a chart showing that 14 of the committee's 17 participants believe the "appropriate target range" for the benchmark rate will be higher than 0.5 per cent before the end the year. Only three people were recorded as projecting the current range - 0.25 to 0.5 per cent - through the end of 2016.

Similarly, 14 of the 17 participants expected that the key interest rates should top 1 per cent by the end of 2017.

The next monetary policy statement is due November 2, six days before general elections, making interest-rate adjustments unlikely for the Fed, which strives to remain above politics. The following meeting, which concludes December 14, is seen as the likely date for Fed action.

The Fed raised its benchmark interest rate in December 2015 from an unprecedented near-zero target - in place since the 2008 financial crisis - to a range of 0.25 to 0.5 per cent.

The median of Fed participants' US economic growth projections was 1.8 per cent for this year, and 2 per cent annually for 2017 and 2018.

The US economy grew in the April-July quarter at an annualized 1.1 per cent, well short of Wall Street expectations. The disappointing performance followed a first quarter in which expansion was just 0.8 per cent at an annual rate, according to the federal Bureau of Economic Analysis.

Chairwoman Janet Yellen said that Fed participants now see the neutral interest rate - or the monetary policy that would spur neither expansion nor contraction - as "currently quite low by historical standards." Therefore, the present rate below 0.5 per cent is "only modestly accommodative," she said.

The Fed's lack of action Wednesday "does not reflect a lack of confidence in the economy," Yellen said.

"But with labour market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2-per-cent target, we chose to wait for further evidence of continued progress toward our objectives."

The July employment report - which came out after the Fed's last meeting on July 26-27 - was strong, but August payroll data from the Bureau of Labour Statistics was weak, as the unemployment rate held steady at 4.9 per cent.

The Fed statement said that economic expansion "has picked up from the modest pace seen in the first half of this year," with "solid" job gains and strong growth in household spending.

Persistent very low inflation is due "partly" to past declines in energy prices and the stronger dollar, which has made imports less expensive for US consumers, the statement said.

Earlier Wednesday, the Bank of Japan announced a new tactic in its own long-running attempts to stoke inflation. While continuing massive bond purchases, the central bank announced a policy to keep yields on government bonds stable at about zero, in hopes of forcing investors to seek returns in the real economy.

Japan has struggled for two decades to escape recurring deflationary cycles and spark economic growth.

Also Wednesday, the Organization for Economic Cooperation and Development (OECD) warned that the global economy is continuing to drag due to weak trade growth and the distorting effects of monetary policy on financial markets.

The Paris-based think tank said the global economy remains in a "low growth trap," partially exacerbated by monetary policy that distorts financial markets by keeping interest rates exceptionally low.

"Monetary policy is becoming over-burdened," OECD chief economist Catherine Mann said. "Countries must implement fiscal and structural policy actions to reduce the over-reliance on central banks and ensure opportunity and prosperity for future generations."

Last update: Wed, 21/09/2016 - 23:13

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