Fed leaves key rate intact; says US economy rising at a 'strong rate'

Washington

FEDERAL RESERVE officials left US interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid "strong" growth that backs bets for a hike in September.

Economic activity has been "rising at a strong rate," and unemployment "has stayed low," the Federal Open Market Committee said on Wednesday in a statement released in Washington.

"Household spending and business fixed investment have grown strongly." While leaving rates on hold as expected, the committee repeated guidance for "further gradual increases" in its policy benchmark, lining up September's FOMC meeting for the third hike of the year.

President Donald Trump lashed out at the Fed last month, saying he wasn't "thrilled" it was raising rates. The comments threw a political cloud over the central bank's decisions, though economists and investors had widely anticipated Wednesday's decision.

Policy makers "are not really affected or paying close attention to the political commentary," said Laura Rosner, senior economist at Macropolicy Perspectives.

"The FOMC did nothing to the statement that would suggest a lower likelihood of a September hike," said former Fed Governor Laurence Meyer, who runs a policy research firm in Washington. "The market has now priced a September rate hike as a near-certainty, and we agree with that assessment."

Fed chairman Jerome Powell is trying to nurture the second longest US expansion on record by slowly reducing the amount of support that monetary policy provides to growth. The economy is riding a tailwind from tax cuts and higher federal spending, though a trade war threatens to dent growth. The committee described risks to the outlook as "roughly balanced," and restated that "monetary policy remains accommodative" while leaving the target range for its benchmark policy rate at 1.75 percent to 2 per cent.

Most Fed officials in June projected three or four rate hikes for 2018, implying one or two more moves this year.

"There's a lot of concern that the trade negotiations and the heightened rhetoric surrounding trade negotiations might lead to slower economic activity later in the year," said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

"While it certainly looks like it's all systems are go for another rate hike in September, and another one in December, the text hasn't been written just yet on that." Pricing in federal funds futures markets imply odds slightly above 60 per cent for a fourth rate hike in December.

Policy makers weighed their action against a generally positive backdrop. The US economy grew at a 4.1 per cent pace in the second quarter, its fastest pace since 2014. Inflation is close to the Fed's 2 per cent goal, rising at 2.2 per cent for the year ending June, while the core rate that excludes food and energy was up 1.9 per cent.

The committee noted in the statement that both headline and core inflation "remain near 2 per cent." Unemployment was 4 per cent in June, below the Fed's 4.5 per cent estimate of the level that reflects full employment.

The gradual pace of rate increases shows that officials want to see if tight labour markets can continue to draw more people into the workforce and produce higher wages, without sparking unwanted inflation.

Wednesday's decision was unanimous 8-0. BLOOMBERG