Wednesday 22 November 2017

US Fed holds rates steady in a nod to global economic weakness

Janet Yellen, chair of the US Federal Reserve
Janet Yellen, chair of the US Federal Reserve

Christopher Condon and Howard Schneider

Federal Reserve officials left interest rates unchanged yesterday, opting to delay an increase amid stubbornly low inflation, an uncertain outlook for global growth and recent financial-market turmoil.

In what amounted to a tactical retreat, the US central bank said an array of global risks and other factors had convinced it to delay what would have been the first rate hike in nearly a decade.

"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Federal Open Market Committee said in a statement in Washington.

In holding their benchmark federal funds rate at zero to 0.25pc, policy makers showed they are still not convinced inflation will move gradually back to their 2pc target, despite continued gains in the labour market. Unemployment in August fell to 5.1pc in the United States, its lowest level since April 2008.

"On balance, labour market indicators show that underutilisation of labour resources has diminished since early this year," officials said.

Richmond Fed President Jeffrey Lacker dissented, saying he preferred to raise the target rate by 0.25 percentage point.

Click to view full size graphic
Click to view full size graphic

Many economists have worried that recent losses in China's equity markets reflect deeper worries over growth prospects for the world's second-biggest economy. Slowing demand from China has also helped trigger a global slump in commodity costs, adding downward pressure to prices in the US.

Inflation, as measured by the Fed's preferred gauge, was 0.3pc in the 12 months through to July and has lingered below 2pc for more than three years.

The committee repeated that it will raise rates when it has seen "some further improvement in the labour market and is reasonably confident that inflation will move back to its 2pc objective over the medium term."

Taken as a whole, the latest Fed projections of slower GDP growth, low unemployment and still low inflation suggest that concerns of a so-called secular stagnation may be taking root among Fed policymakers. One policymaker even suggested a negative federal funds rate.

The median projection of the 17 policymakers showed the Fed expects the economy to grow 2.1pc this year, slightly faster than previously thought. However, its forecasts for GDP growth in 2016 and 2017 were downgraded.

Policymakers also forecast inflation to creep only slowly toward the Fed's 2pc target even as unemployment dips lower than previously expected. They now expect the unemployment rate to hit 4.8pc next year, remaining at that level for as long as three years.

The Fed's projected path of interest rates shifted downward, with the long-run federal funds rate now seen at 3.5pc, compared to 3.75pc at the last policy meeting.

The vote on the policy statement was a sign of how China's economic slowdown and market slide left Fed officials unnerved about the state of the world economy. In recent months Fed officials like board member Jerome Powell and Atlanta Fed President Dennis Lockhart had publicly endorsed a September rate hike, forming a near majority along with longstanding inflation hawks like Lacker.

In the end, however, they were left with a muddled picture marked by low US unemployment and steady economic growth, but no sign inflation has begun to rise towards the 2pc target. (Bloomberg and Reuters)

Irish Independent

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