A divided Fed holds: US leaves interest rates unchanged as case for second rate hike in almost a decade strengthens

Billy Bambrough
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Fed chair Janet Yellen has stood by claims there could have been a hike at this meeting (Source: Getty)

The US Federal Reserve's rate-setting Federal Open Market Committee (FOMC) has voted to leave interest rates on hold but has set the scene for a hike before the end of 2016.

The Fed raised its benchmark overnight interest rate to a range of 0.25 per cent to 0.50 per cent in December – the first rate hike in almost a decade – but has held rates steady so far this year.

The vote was 7-3 in favour of holding rates, with the case for a rate hike strengthening in recent months. The split marks the level of dissent with the Fed, where Fed chair Janet Yellen has previously worked to maintain agreement on decisions.

Esther George of the Kansas City Fed, Loretta Mester of the Cleveland Fed, and Eric Rosengren of the Boston Fed were the three committee members that voted for an immediate rate rise in the meeting.

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During a press conference following the announcement, Yellen said the committee was “generally pleased with how the US economy is doing", and did not see signs the economy was “overheating”.

She faced questions ranging from her opinion on the on-going effects of the Brexit vote, Donald Trump's potential US presidency, and the recent scandal at Wells Fargo involving fake bank accounts.

Trump, the Republican candidate, has attacked the Fed for keeping rates low, suggesting policy makers are working on behalf of President Barack Obama to artificially boost the economy.

The forecast for future rate rises has been dialled back to a slower pace, with 0.5 per cent expected to be added next year and 0.75 per cent in 2018 and 2019.

The statement released along side the decision read:

The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.

The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to two per cent inflation.

The full statement can be read here.

Anna Stupnytska, global economist at Fidelity International, said:

A decision whether to hike rates or not this year has now become a question of the Fed’s credibility. Investors have been frustrated with the Fed’s confusing communication as of late and seemingly little concern about potential financial stability implications related to keeping rates low for so long. A well telegraphed hike in December would go some way to appeasing these concerns.

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Tepid inflation and recent weak economic data meant Fed watchers had factored in a slim chance – 20 per cent – of a rate increase at the conclusion of the Fed's two-day policy meeting.

"That's precisely what the outcome of the meeting is likely to be: No move at this meeting, but a relatively low bar for hiking in December," wrote Roberto Perli, a partner at Cornerstone Macro LLC, in a note to clients ahead of the decision.

Earlier this year the chances of a hike at – or before – this meeting touched 90 per cent.

Many now see an increased likelihood of a hike by the end of the year, with the majority expecting one at the meeting in December.

The Fed's next meeting in November is unlikely to prompt any action as it falls very close the US presidential election, set for 8 November.

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