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Fed holds rates but edges closer to December hike

Fed holds rates but edges closer to December hike

The Federal Reserve (Fed) has kept rates unchanged for the sixth straight meeting but left the door open for a hike in December.

The decision was widely expected by markets but it was the first time since December 2014 that three members of the Federal Open Market Committee went against the consensus, voting for a rise. 

The Federal Open Market Committee said on Wednesday: ‘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.’

Fed chair Janet Yellen was frank about the probability of an increase later in 2016.

She told a press conference: ‘Our decision does not reflect a lack of faith in the economy. Conditions in the labour market are strengthening and while inflation is low we continue to expect to see it rise to our target of 2%.’

However, Yellen argued the economy ‘had room to run’ and that the Fed would wait to see further evidence of improvement before raising rates.

‘We generally agreed that gradual increases of the federal funds rate, to remove what is a modest degree of accommodation, will be appropriate, but we don’t see the economy as overheating now,’ she said. ‘My colleagues and I exchanged views at this meeting on the appropriate timing of the next step of removing policy stimulus. 

‘Most of us judge that the case for an immediate increase in the federal funds rate is stronger but that it would be sensible, given the finding of a bit more room to run, to wait and see evidence that we continue to progress towards our objectives.

‘For the time being we are going to watch for incoming evidence. Most participants do expect one increase in the federal funds rate would be appropriate this year and I would expect to see that if we continue the course of labor market improvement and there are no major new risks that develop.’ 

Rate expectations 

However, not every portfolio manager believes the Fed will come good on this plan.

After it raised rates in December 2015, the first hike since 2006, the Fed set out plans for four further increases in 2016. After market’s suffered a jittery start to the year this was revised down to two increases, which has since fallen to one following concerns about weaker than expected US jobs data and the UK’s decision to leave the European Union.

Julien Scholnick, manager of the Western Asset Core Bond fund and Western Asset Intermediate Bond fund, said the Fed’s medium-term outlook on inflation and growth could mean it backs out of a rate rise in December.

‘Yellen is much more worried about the risk of hiking early rather than hiking too late,’ he said.

Rick Rieder, BlackRock chief investment officer of global fixed income, saw things differently.

‘They clearly indicated that the central bank continues to move down a deliberate path of policy moves and maintains each FOMC meeting as a potentially “live” event regarding potential rate change,’ he said. ‘That message was important, as markets have lately excessively discounted the Fed’s willingness to move rates at all.’

He added that a change in fiscal policy rather than monetary policy was now needed to stimulate economic growth.

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