Fed keeps US rates steady, to unwind portfolio in October

Cornelia Mascio
Settembre 21, 2017

Andrew Hunter at Capital Economics chipped in: "We had suspected that the recent softness of core inflation could persuade officials to hold off on the next rate hike until next year but, given these latest projections and the broadly unchanged language on inflation in today's policy statement, we now expect the Fed to push on and raise rates again in December".

Caught between a lull in US inflation and a stronger global economy, the Federal Reserve is expected on Wednesday to signal whether it will raise interest rates for a third time this year or back off until prices rise more briskly.

But others say that on top of chronically low inflation, the economic slowdown caused by Hurricanes Harvey and Irma could be more severe than initially forecast and cause the Fed to remain on hold for longer.

The Fed has raised interest rates twice this year, separately in March and June. Minutes from recent Fed meetings have shown a growing split, with some policymakers saying there is no urgency to raise rates after a drop in inflation, and others arguing the US economy is strong enough to continue "normalizing" monetary policy.

Still, a majority of Fed policy makers projected that they see the US central bank's benchmark rate rising by a quarter percentage point by year end from its current range of 1 percent to 1.25 percent.

Benchmark U.S. Treasury yields jumped to their highest in six weeks. At the time, it also reduced its benchmark interest rate to zero, and only began raising it in December 2015, seven year after the crisis. A higher target rate, meanwhile, would push the Fed further from the zero percent lower bound it has been trying to escape after a decade nurturing the USA economy into a post-crisis recovery. At this rate, the Fed's balance sheet would still be above $3 trillion by late 2019. Anyone ruling out a December rate increase "is mispricing the real desire on the part of the Fed to continue" normalizing monetary policy despite the dip in inflation, said Jason Celente, senior portfolio manager at Insight Investment. Doing so, even gradually, will likely make some long-term loans, like mortgages, costlier.

According to the Fed's economic projections which were released on Wednesday, Fed officials expected the U.S. economy to grow 2.4% this year, higher than their forecast of 2.2% in June.

The Fed has said the "normalization" program is created to run in the background, to avoid roiling financial markets.

The Fed will update its economic forecasts, which are compiled from the projections of its board members and the 12 regional Fed bank presidents. The unemployment rate is just 4.4 per cent, near a 16-year low. Yellen's four-year term as chair will end on February 3. Last week, Trump said of Yellen, "I like her, and I respect her" but added, "I haven't made a decision yet".

When asked about her future, Yellen, the first woman to lead the Fed, has said only that she intends to serve out her term as chair. So far, Trump has moved to fill only one spot, nominating Randal Quarles, who has yet to be confirmed by the Senate, to the key post of vice chairman for bank supervision.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

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