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US Federal Reserve keeps benchmark interest rate unchanged

http://www.channelnewsasia.com/image/8967414/16x9/670/377/577e3faa28f32b58addb4dd82b2e017f/yI/there-is-little-doubt-that-the-us-financial-system-is-stronger-today-than-it-was-a-decade-ago-jerome-powell-said-in-testimony-to-be-delivered-before-the-senate-banking-committee-but-we-must-also-be-vi-1498084190995-4.jpgExterior view of the US Federal Reserve building in Washington, DC. (AFP/KAREN BLEIER)
WASHINGTON: The US Federal Reserve kept its benchmark interest rate unchanged on Wednesday (Jul 26) but gave no clear signal about the chances for another increase this year or about any concerns about low inflation.
But the central bank did confirm that it plans to begin to reduce its massive bond holdings "relatively soon."
In the absence of any signs of inflation pressure, the policy-setting Federal Open Market Committee elected to hold off on raising the key lending rate, and repeated that it "is monitoring inflation developments closely."
That was largely as expected, and analysts said the Fed has nothing to gain by surprising markets, and no evidence in the data impelling it to move.
But the statement at the conclusion of the two-day meeting gave economists very few hints of the Fed's thinking since it was barely changed from the statement issued in June, when the central bank raised interest rates by a quarter point to the current range of 1.0-1.25 per cent.
Despite nearly seven years of uninterrupted job creation and a very low unemployment rate of 4.4 per cent, inflationary pressures and wage gains have shown little sign of life, something that has baffled economists.
The Fed has pointed to transitory factors like falling prices for mobile phone plans and prescription drugs, which will continue to depress closely-watched inflation measures for some time, but some analysts are skeptical that those factors explain the whole story.
"The Fed did the bare minimum today, acknowledging recent economic data and little else," Chris Low of FTN Financial said in a client note. "They clearly don't see any need to rethink their inflation forecast now."
INFLATION BELOW 2%
The Fed statement noted that the 12-month inflation rate as well as the core measure that excludes volatile food and energy prices have declined "and are running below two per cent."
The June statement said the rates were "somewhat below" that target - one of very few minor changes in the language.
And while inflation is expected to remain below the central bank's two per cent target in the coming months, the statement repeated the view that it is expected to "stabilise around the Committee's two percent objective over the medium term."
But longtime Fed-watcher Mickey Levy of Berenberg Capital Markets said the signs to support that confidence are not visible in the data. "Broadly speaking, a sustained return of inflation to two per cent seems further off," he said in a commentary.
Even faced with this low-inflation picture, the committee said it continues to expect "economic conditions will evolve in a manner that will warrant gradual increases" in the key policy interest rate.
The Fed's own projections in June showed the majority of policymakers expect a third rate hike this year, and three more in 2018 and 2019.
But analysts in recent weeks have become increasingly doubtful the Fed will decide to go ahead with a third increase in the benchmark lending rate this year, although a slight majority still sees another hike in December.
"The soft inflation developments indicate that the risks are for a shallower path of rate hikes," Levy said.
Joe Manimbo, senior market analyst for Western Union Business Solutions, was more blunt saying the Fed is "a bit more concerned about the inflation outlook which puts in jeopardy another rate hike this year."
BALANCE SHEET NORMALISATION
Meanwhile, the central bank also confirmed that it will begin implementation of a plan "relatively soon" to reduce the size of its investment holdings, which were built up to record levels during the financial crisis to help support the economy, especially once interest rates reached zero.
As long as the economy "evolves broadly as anticipated," the plan would gradually reduce the holdings of mortgage-backed securities - something most analysts expect to start in September, the statement said.
Most analysts expect the process to start in September but once it begins it will run in the background, on a set course with very gradual moves, and will not require further announcements from the FOMC.
US Federal Reserve keeps benchmark interest rate unchanged Reviewed by Chidinma C Amadi on 5:34 PM Rating: 5

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