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Balancing act expected as divided Fed reviews US economy

[WASHINGTON] The Federal Reserve was not expected to change key interest rates on Wednesday at the conclusion of a closely watched two-day meeting on monetary policy.

But global markets will be watching for signals that the central bank sees a strengthening economy and for the possibility that rate increases could come later in 2016.

The Federal Open Market Committee, the Fed's policy board, has over the last eight months been Janus-faced and ambivalent, alternately seeing both strength and weakness in the assortment of economic indicators it reviews ahead of its meetings.

After imposing the first rate hike in nine years in December, setting the target federal funds rate at 0.25-0.5 per cent, the committee predicted "moderate" expansion in 2016 and a series of further increases.

But the reading of tea leaves since then seems to have told policy makers almost everything and then the contrary, leaving the path of planned monetary tightening in the air.

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"I don't think they're going to raise rates at all this year," said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.

Labour markets were improving until May, when a shock jobs report showed gains of only 11,000 new positions. Business fixed investment increased - until of course it didn't, becoming "soft" between January and March.

Housing markets were strong but net exports were not. Household spending expanded but inflation remained stubbornly low, with energy and import prices declining.

Then there was Brexit - the British vote last month on whether to secede from the European Union - and the fears it raised of slowing growth.

As the FOMC meeting resumed Wednesday morning, yet another indicator complicated the picture: orders for durable goods fell for a second straight month, sinking 4 per cent from May to US$219.8 billion.

Whipsawed by such contradictory winds, the FOMC has split, with some members calling for rate hikes to prevent risky behaviour on Wall Street or a sudden rate hike in the future, while others insist on holding off to avoid further stifling both US and global economic activity.

Under such conditions, markets will look in the FOMC policy statement Wednesday only for signs as to what to expect in the near future. Fed Chair Janet Yellen will not be giving any press conference at the end of Wednesday's meeting.

"Today's Federal Reserve meeting is all about the statement," James Stanley, a foreign exchange analyst at DailyFX.

"Don't expect the Fed to be overly hawkish here, as there remains a plethora of risks for the global economy from the major economies and trading partners of China, Europe and Japan."


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