The US Federal Reserve has decided to remain on hold at its September meeting, though notes the case for a rate rise has “strengthened” since July.
The Federal Open Market Committee (FOMC) decided to “maintain the target range for the federal funds rate at 1/4 to 1/2 per cent” and wait until it sees more evidence of continued progress towards the Committee’s goals, the Fed said.
Pimco global strategic adviser Richard Clarida noted that while the FOMC “chose not to offer further calendar guidance” on when rates may rise, it did comment on the balance of risk.
“In July, the Fed statement acknowledged that 'near-term risks to the economic outlook have diminished' but omitted, as had all previous statements this year, any language on the balance of risks,” Mr Clarida said.
“In today’s statement, the Fed returns the balance of risk language, telling us that the FOMC feels that risks ‘appear roughly balanced’.”
Mr Clarida added that the Fed’s summary of economic projections shows the Fed still anticipates a rate hike later this year, though both Mr Clarida and AMP Capital chief economist Shane Oliver note this will be dependent on economic data over the coming months.
“With the obligatory ‘data dependency’ caveat, this is a committee that expects to hike later this year, which would mean at the December meeting,” Mr Clarida explained.
Mr Oliver noted that the US money market has put the probability of a December hike at 61 per cent, which he added “sounds about right”.
“The bottom line is that with US growth running around 2 per cent or a bit less and inflationary pressures remaining below target, global risks remaining, the strength in the US dollar over the last two years and the recent, regulatory driven rise in US interbank lending rates doing part of the Fed’s job for it, the Fed remains rightly cautious in removing monetary stimulus,” he said.
“This is likely to remain the case for some time to come.”
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