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Economy

U.S. Fed keeps rates unchanged, setting stage for rate hike by year-end

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2016-09-22 12:39Xinhua Editor: Mo Hong'e ECNS App Download
U.S. Federal Reserve Chair Janet Yellen speaks during a news conference in Washington D.C., capital of theUnited States, Sept. 21, 2016. (Photo: Xinhua/Bao Dandan)

U.S. Federal Reserve Chair Janet Yellen speaks during a news conference in Washington D.C., capital of theUnited States, Sept. 21, 2016. (Photo: Xinhua/Bao Dandan)

The U.S. Federal Reserve on Wednesday kept its federal funds rate unchanged amid recent weak economic data and tepid inflation, but strongly signaled that the central bank could have one rate hike by the end of this year.

"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 Fed's policy-making committee said in a statement released after its two-day meeting.

"The economy has a little more room to run than might have been previously thought. That's good news...we don't see the economy as overheating now," Fed Chair Janet Yellen said Wednesday at a press conference, suggesting the Fed had the opportunity to allow the labor market to continue to improve without running a hot economy.

Fed governors Lael Brainard and Daniel Tarullo have both recently argued that the central bank should wait for more evidence of sustained inflation before another rate hike.

The core price index for personal consumption expenditure (PCE), the Fed's preferred indicator for gauging core inflation excluding food and energy, increased 1.6 percent in July from a year ago, still below the central bank's target of 2 percent.

"Almost since the turn of the year core inflation has been stuck at 1.5 percent with really no clear signs that it's moving up yet," said David Stockton, former Fed chief economist and senior fellow at the Peterson Institute of International Economics.

"I do think the case for patience and waiting just a bit longer is to make sure that in fact the Fed's expected return to 2 percent looks like it's actually under way," he added.

Yellen said, "This cautious approach to paring back monetary policy support is all the more appropriate given that short-term interest rates are still near zero."

"We can more effectively respond to surprisingly strong inflation pressures in the future by raising rates, than to a weakening labor market and falling inflation by cutting rates," she said.

But Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren all voted against the policy statement, saying they preferred to raise rates at this meeting.

The opposition underscored the intense policy debate inside the central bank and a heavily divided Fed over rate hikes.

The Fed's updated projections released Wednesday showed that policymakers expected the federal funds rate to rise to around 0.625 percent at the end of 2016, implying one rate hike this year, down from two estimated in June.

The Fed raised its target range for the federal funds rate by 25 basis points to 0.25-0.5 percent in December last year, the first rate hike in nearly a decade.

However, a slowdown in global economy since the start of this year and other global financial risks have made Fed policymakers cautious and hold off on any further rate hikes.

Yellen said she expected one rate increase this year if the labor market continued to improve and "there are no major new risks that develop."

The Fed also said in the statement that U.S. economy "has picked up" from the modest pace in the first half of the year, and the near-term risks to the U.S. economic outlook "appear roughly balanced," a further sign that the central bank could raise rates by the end of this year.

The Fed will hold its next policy meeting on Nov. 1-2, just days before the U.S. presidential election on Nov. 8, but few in the markets expected the Fed to raise rates at that time.

"The Fed is non-political, it's certainly not going to be influenced in decisions by desire to help one candidate or the other," said Charles Collyns, managing director and chief economist at the Institute of International Finance.

"But if it sees the presidential election as leading to intense uncertainty in the market, that could be a factor that will lead to delay rate increases until after the election in December," he said.

Eswar Prasad, a professor at Cornell University and senior fellow at the Brookings Institution, told Xinhua that "we could see a rate hike at the end of this year" if the U.S. economy remains strong with good job growth and inflation continues to pick up.

About 74 percent of 62 economists surveyed by The Wall Street Journal this month believed that the Fed will wait until Dec. 13-14, the Fed's final meeting of this year, to raise rates.

  

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