Like Nigeria, US Fed. holds rates, paves way for a December hike

The Federal Reserve once again pushed back plans to raise interest rates on Wednesday, a widely expected move following a series of mixed economic reports and varied signals from Fed officials. This is similar to what the Central Bank of Nigeria did Tuesday, when it was widely expected that the bank would reduce rates in line with the expectation of the finance ministry. 

After its two-day policy meeting, the Federal Open Market Committee voted to hold the federal funds rate between 0.25% and 0.50%, citing progress in economic and labor market growth and an improving risk outlook.

It’s worth noting, however, that three members of the committee — Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren — voted against the decision, preferring to raise the federal funds rate to 0.50% to 0.75% at this meeting.

“The highly-unusual 7-3 FOMC vote speaks to the complexity facing the Fed operating in a prolonged period of highly unbalanced policy mix,” Allianz’s Mohamed El-Erian said.

“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 central bank wrote in its statement.

 

For the first time this year, the Fed concluded that “near-term risks to the economic outlook appear roughly balanced.” The reintroduction of the balance of risks statement, a sentence the Fed included in nearly all of its 2015 press releases, is a step some analysts consider a necessary precursor to a rate increase.

The Fed’s cautious, yet generally positive, economic statement follows a slew of mixed data in August, including weak retail sales, soft ISM manufacturing and services readings, and slower-than-expected hiring. The unemployment rate has hovered around 5% for the past year—a level many economists consider to be near full employment. However, output growth has been less than impressive. Real GDP is now estimated to have increased only 1.1% in the second quarter.

“[G]rowth of economic activity has picked up from the modest pace seen in the first half of the year,” the Fed wrote in its statement. “Although the unemployment rate is little changed in recent months, job gains have been solid on average.”

Meanwhile, inflation, which has run below the Fed’s 2% target for years, has started to show signs of improvement. The personal consumption expenditures index, the Fed’s preferred measure of price inflation, increased 0.8% in July from the year before, as core inflation rose 1.6%. Another measure of inflation, the core reading of the Consumer Price Index, rose 2.3% year-over-year in August. However, the Fed sees inflation remaining “low in the near term.”

Fed projections and dot plots

The Fed’s expectations for short-term and long-term GDP growth dropped to 1.8% from 2%, while forecasts for unemployment remained mostly unchanged, with officials expecting the rate to fall to 4.6% by 2019. The outlook for core inflation decreased to 1.8% by 2017.

Fed officials’ projections for the federal funds rate dropped, indicating one quarter-point increase this year, rather than the two hikes envisioned in June. Shortly after the Fed began raising rates last year—for the first time in over a decade—turmoil in US markets and uncertainty abroad convinced many officials to delay further rate increases.

Long run expectations for the fed funds rate also declined to 2.9% from the 3.0% forecasted in June.