Fed leaves key rate unchanged but hints at upcoming hike

Fed leaves key rate unchanged but hints at upcoming hike

Troy Powers
November 5, 2016

Angel Broking said it believes that the US Federal Reserve is likely to raise policy interest rates starting from December this year.

But it's getting very close.

The market has been dealing with a lot of uncertainty in recent months, with the biggest uncertainty being the upcoming presidential election.

Analysts noted that whether the Fed raised rates this week or not until mid-December would make little economic difference.

The policy statement fell short of being as specific about a December rate hike as the October 2015 policy statement that set the conditions for a rate hike at the "next meeting". But the brighter economic portrait it sketched Wednesday suggested that a rate increase is edging closer.

However, on the positive side, the rate hike would also signal increased confidence in the USA economy.

October: The statement removed a reference to inflation "remaining low", a sign that Fed policymakers see inflation firming: "Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further".

When leaving rates unchanged in September, the FOMC acknowledged the case for tightening policy had "strengthened".

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The third, Boston Fed President Eric Rosengren, opted to support Wednesday's decision to hold rates steady.

Looking at the good and the bad, the Fed concluded "near-term risks to the economic outlook appear roughly balanced". Translation? That the economy is no more likely to underperform the Fed's expectations than to exceed them - well, nearly so. What's more, it no longer thinks inflation will stay low over the next couple of years.

The Fed's years of ultra-low short-term rates were credited by many analysts with rejuvenating the economy after the Great Recession. The Fed is supposed to operate completely independent of politics, and it surely wanted to avoid any suspicion of acting in a way that might affect Tuesday's vote. Investors had all but discounted a rate increase this week, but overwhelmingly see the Fed raising borrowing costs next month.

"The bar for action has been moderately reduced with the insertion of the word 'some", ' said Carl Tannenbaum, chief economist at Northern Trust and a former Fed official.

The Fed said nothing explicit in Wednesday's statement about considering a rate increase at its "next meeting" - words it had used previous year in a statement it issued before it raised rates in December. By then, whatever fallout the election might produce will possibly have settled, at least somewhat.

He noted that Chair Janet Yellen is scheduled to hold a news conference after the Fed's next meeting December 13-14. That will allow her to explain any action the bank takes and perhaps give guidance on how many further rises can be expected next year. Rate hikes can upset financial markets - and such turmoil could unfairly influence voters' perceptions of the economy just before they vote.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: "Only a shock - the election of Trump, or an external geopolitical or market event - can now prevent a December hike".