You are here

US Fed holds rates unchanged, still sees 'gradual' hikes

Thursday, February 2, 2017 - 06:28

41380228 - 02_02_2017 - FILES-US-ECONOMY-BANK-RATE.jpg
The US Federal Reserve kept the benchmark interest rate unchanged on Wednesday in its first policy meeting since President Donald Trump took office, and said it still expects to need only gradual rate increases.

[WASHINGTON] The US Federal Reserve kept the benchmark interest rate unchanged Wednesday in its first policy meeting since President Donald Trump took office, and said it still expects to need only gradual rate increases.

While striking an optimistic tone about the outlook for the economy, the central bank statement gave no hint of increased concern about possible spending or tax policies by the Trump administration that might create pressure to hike rates faster.

The policy-setting Federal Open Market Committee noted continued economic growth, solid job gains as well as improving business and consumer confidence.

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate," the FOMC said in the statement that was nearly identical to December's.

sentifi.com

Market voices on:

The FOMC gave no sign it is worried about inflation, which has been inching higher but remains "below the Committee's 2 per cent longer-run objective."

However, it no longer cites low energy prices as a factor keeping prices low.

The Fed last month adopted only its second interest rate hike in a decade - putting the target range for the overnight lending rate at 0.5 per cent to 0.75 per cent. And it indicated it expected to implement three interest rate increases this year.

Central bankers have been cautious about raising rates too quickly, and are expected tread cautiously as the Republican Trump administration sends shock waves around the world, threatening to cancel trade pacts and impose new tariffs, criticising trade partners and promising economic stimulus, tax cuts and slashed regulation.

But concrete policies have yet to take shape. Members of the FOMC last month cited "considerable uncertainty" about the economic outlook.

The concern is that with unemployment already low, below five per cent, and wages and inflation starting to creep up, major government spending now risks overheating the economy and sending prices soaring.

That likely would prompt the Fed to raise interest rates even faster - and possibly put Fed Chair Janet Yellen at odds with Mr Trump.

"The Fed could find itself in a quagmire in the next couple of years if fiscal reform leads to an overheating economy," said economist Mickey Levy of Berenberg Capital Markets.

Ms Yellen said recently the central bank will be watching to see what policies the Trump administration pursues.

Ironically, the Fed for years urged the government to use spending or other fiscal policy tools to take the pressure off monetary policy, which was testing the limits of effectiveness in keeping near-zero interest rates for nearly a decade.

But in a split government, the Democratic Obama administration failed to gain approval from the Republican-controlled Congress for infrastructure spending and other projects that Mr Trump favours.

Mr Trump will have a more favourable audience for his plans, including his promise to double economic growth to four per cent a year.

But if the Fed raise rates in response, that would then tend to slow growth and boost the value of the US dollar, which would make exports less competitive.

Mr Trump has criticised Ms Yellen's handling of monetary policy during the economic recovery, for keeping rates too low for too long, but it remains to be seen what he would do if Fed policy moves the other way.

Ms Yellen's term expires Feb 1, 2018, and Vice-Chair Stanley Fischer's term ends in June 2018. There also are two open positions on the Fed's Board of Governors that Mr Trump can fill to leave his mark on monetary policy.

While analysts were not expecting any change at this meeting, they were watching carefully for some hint the policymakers were leaning toward a rate cut sooner rather than later. They will have to keep waiting.

The FOMC statement repeated that central bankers will be watching inflation and unemployment, and assess a wide range of information including "indicators of inflation pressures and inflation expectations, and readings on financial and international developments," but gave no more detail.

The minutes of the meeting will be released later this month and should provide more insight into the policymakers' thinking, and the next FOMC meeting is in March.

Jason Schenker of Prestige Economics noted that "it will take time before a full fiscal plan can be approved - and even longer before it could impact the US economy," so he only expects two rate increases this year.

The Fed also noted that business investment "remains soft" even as household spending has been rising, but "consumer and business sentiment have improved of late".

AFP

Nespresso
Pair your daily business read with the perfect cup of espresso.

Subscribe to The Business Times today to receive your very own Nespresso Inissia coffee machine worth $188.

Find out more at btsub.sg/btdeal

Powered by GET.comGetCom