Federal Reserve sees better outlook; December rate hike possible

[WASHINGTON] The Federal Reserve kept its benchmark interest rate unchanged on Wednesday but, showing more confidence in US economic growth, made clear an increase is possible in December.

After a two-day meeting, policy makers at the US central bank expressed more faith in the strength of the economy than expected, brushing over recent weak spots and focusing on what they called "solid" consumer spending and business investment.

The Federal Open Market Committee also dropped its warning from September that the global downturn could affect the US, even as worries mount over China's slowdown and falling commodity prices.

Data since the September meeting "suggests that economic activity has been expanding at a moderate pace," the FOMC said in a statement.

"Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further," it said.

The FOMC decided, as expected, to keep the federal funds rate at 0-0.25 per cent, where it has sat since 2008.

But, amid pre-meeting expectations that a rate increase would be delayed until at least March, the FOMC explicitly pointed to the possibility in its "next meeting," which takes place on December 15-16.

While a rate hike has been long-awaited, it nevertheless raises the prospects of higher costs of capital and weaker emerging-market currencies around the world.

In reaction, the dollar moved sharply higher, gaining about 1.5 per cent on the euro at US$1.0910.

US stocks plunged on the news but rebounded by the end of trade, the S&P 500 finishing with a 1.2 per cent gain for the day.

"The FOMC statement shows the Fed has become less concerned about global risks feeding back into the US economy," said Ian Shepherdson of Pantheon Macroeconomics.

"The December hike now hinges on the next two employment reports. Some combination of payrolls, unemployment and wages signaling continued improvement will be enough," he said.

'FINGER ON THE TRIGGER'

The FOMC shrugged off some recent data, including a downturn in US monthly job creation numbers, that for many indicated the US economy has been slowing in recent months.

But the panel argued that anyway the jobs market has been tightening "since early this year." It also accepted that inflation is weak, but partly blamed the fall in energy prices and cheaper imports, a function of the strong dollar.

The FOMC expressed confidence that inflation will move up toward its 2.0 per cent target "as the labour market improves further and the transitory effects of declines in energy and import prices dissipate."

The FOMC also dropped a key line that appeared in the September policy statement showing some worry about how the turmoil in global markets and China's downturn would impact US growth.

Rather than saying, as before, that global developments "may restrain (US) economic activity somewhat", the committee simply said it is "monitoring global economic and financial developments."

The FOMC statement was closely aligned with the view of Fed Chair Janet Yellen, who has repeatedly said that, if the economic data holds up, a rate increase could come before the end of the year.

Earlier this month two more dovish Fed governors, both also on the FOMC, appeared to break with her when they made clear they favored waiting until next year.

But the policy statement showed only one dissent in the 10-person vote, from a policy hawk, Jeffrey Lacker, who was already pressing for an immediate rate hike in September.

The statement stressed, as Ms Yellen always does, that any decision will depend on what the most recent data tells the FOMC.

Even so, said Jason Schenker at Prestige Economics, "today's Fed statement further confirmed that the FOMC's finger is on the rate hike trigger."

AFP