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As election looms, divided US Fed begins meet on rates

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A divided US Federal Reserve on Tuesday began a two-day meeting on interest rate policy as bitterly contested US elections loomed large on the horizon.

[WASHINGTON] A divided US Federal Reserve on Tuesday began a two-day meeting on interest rate policy as bitterly contested US elections loomed large on the horizon.

Most observers and market players do not expect the Federal Open Market Committee, the Fed's monetary policy board, to announce a rate hike when the meeting lets out on Wednesday afternoon, despite some recent signs of improving health in the world's largest economy.

Instead, the Fed may use the occasion to put the public on notice to expect a rate hike in December - though even that is far from guaranteed.

Fed Chair Janet Yellen in recent months has signalled that the case for raising rates has grown stronger. But the FOMC does not appear to be under pressure to act immediately.

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Raising rates so close to an election, which could invite needless political controversy, is also rare for the Fed, which has done so only once since the 1980s. Researchers say, however, that there is little evidence the FOMC acts based on the US political calendar.

"Although we think the committee will hike in December, our analysis suggests that the fundamental macroeconomic argument for hiking rates is as weak as it was last December when they hiked rates for the first time in a decade," Steven Ricchiuto, chief economist at Mizuho Americas, said in a client note.

The course of policy tightening announced by the Fed since last December has proven to be far slower and more shallow than expected, as FOMC members in 2016 have repeatedly put off rate hikes citing weak global and domestic economic performance and uncertainty from political events.

A minority of US central bankers favour raising rates immediately but have been out-voted since the summer by other FOMC members who believe this could interrupt what has been a disappointingly slow economic recovery.

Since the Fed's last meet in September, the US economy has gained pace, growing at a 2.9 per cent clip in the third quarter and adding a solid 156,000 jobs in September, with unemployment holding steady at 5 per cent.

On an annual basis, inflation stood at 1.2 per cent in September, its highest level in nearly two years but well below the Fed's 2 per cent target range.

Joel Naroff of Naroff Economic Advisors said the volatility of some data, such as consumer spending, which had been up and down since July, argued for caution in interpreting trends.

"The Fed claims it watches incoming data," Mr Naroff wrote in a client note.

"Well, the incoming data can be volatile. So watching any month's numbers is a dangerous thing to do."

Economic and political calendars also contain much which could derail a December rate hike, such as raucous US elections and their uncertain aftermath and two more monthly jobs reports, as well as struggling crude markets and political developments in Europe.

On Tuesday, Fed funds rate futures, which indicate investor expectations for monetary policy, put the likelihood that the Fed will not raise rates this week at 92.8 per cent. But the probability of a hike in December is put at 70 per cent.

AFP

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