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US Fed leaves rates on hold

US Fed leaves rates on hold

Jessica Yun
— 1 minute read

The US Federal Reserve decided against making any changes to its target interest rate, with the next hike expected in September 2018.

The US Federal Reserve decided to maintain interest rates at 1.75 per cent to 2 per cent after its meeting on Wednesday 1 August.

“The labor market has continued to strengthen and that economic activity has been rising at a strong rate,” according to a statement by the Federal Open Market Committee (FOMC)

“Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly.

“On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 per cent. Indicators of longer-term inflation expectations are little changed, on balance.”

Fidelity International global economist Anna Stupnytska described the meeting as “uneventful” and the policy statement as having presented no surprises.

The US was currently enjoying strong growth in the second quarter, solid labour market indicators

“Given this backdrop, there was no obvious reason for the FOMC to change the message or steer away from the policy path communicated via the dots at present,” she said.

The escalating trade conflict between US and China presented “a cause for concern” but thus far there hadn’t been enough evidence to see any impact of the tariffs on the economy.

“Sentiment though has been affected to some extent but any related concerns among the FOMC members have not yet made it to the official policy statement.

“Unless this picture changes dramatically between now and the next meeting, today’s policy statement sets the stage nicely for a hike in September.”

US monetary policy diverges from ECB

According to Ostrum Asset Management chief economist Philipe Waechter, the latest Federal Reserve meeting was an “opportunity” for the US to demonstrate that its monetary policy was moving away from that of the European Central Bank.

“Before 2014, both strategies were perceived as a response to the same global business cycle.

“It’s no longer the case. Each central bank policy is now depending on its own regional momentum,” Mr Waechter said.

“The first consequence of this divergence is that we expect a stronger dollar in a foreseeable future.”

This would fare badly for emerging markets and, indeed, become increasingly worse,” he added.

“Higher US short-term rates and a stronger dollar will push investors to reduce their carry trade positions on emerging markets.”

“The second consequence is that the divergence in rates will continue as the Fed will maintain its tighter bias in the conduct of its monetary policy.”

 

US Fed leaves rates on hold
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