Markets expect NO RATE HIKE as Fed meeting opens

WASHINGTON – The Federal Reserve opened a two-day monetary policy meeting on Tuesday (Sep 20) with widespread expectation that it will keep interest rates locked at an ultra-low level due to still-tepid economic growth.

Data showing weak inflation and a downturn in consumer spending last month leave the policy-setting Federal Open Market Committee in the same position it has been in each of its five previous meetings this year.

It has wanted to get away from the extraordinarily loose monetary policy dating back to the 2008 crisis, but still finds frailties and risks present that could set back US momentum if it adds to that a rate hike.

In August, encouraged by remarks from Fed Chair Janet Yellen that conditions were ripe for an increase – including persistent gains in the jobs market – markets were betting strongly that the benchmark federal funds rate would be lifted this week, from its current 0.25-0.50 per cent level.

But weak economic data since then has left markets giving a rate hike, when the FOMC concludes its meeting at 1800 GMT Wednesday, at best a 15 per cent chance.

“It seems like every time the Fed places a rate hike ‘on the table,’ the economic data quickly weaken, making the chances of an actual rise ever rockier. So it appears set to go with September,” said Pedro da Costa of the Peterson Institute for International Economics.

Many analysts were setting their sights on an increase at the December FOMC meeting. But others say uncertainty about the US and global economy will continue to bind the Fed’s hands.

“We do not expect a change in Fed policy, and we continue to forecast no policy rate changes for the balance of the year,” said Jason Schenker of Prestige Economics in a client note. “We believe the Fed’s next move will be to cut rates in 2017.”

Just three weeks ago, Fed Chair and FOMC head Janet Yellen said clearly that she thought the time had come, that the solid labor market and the inflation outlook meant “the case for an increase in the federal funds rate has strengthened.”

But the data since then has not supported that view. Job creation has been relatively good, and the housing market solid. But, extending the second-quarter’s slump, industrial output and consumer spending have stayed weak.

In addition, inflation – which the Fed has sought to increase with its hefty stimulus policy – remains feeble, not appearing to react to a world awash in easy money.

An increase could happen on Wednesday, but it would surprise and shock markets, something the FOMC has been loath to do. Instead, it works hard, though not always successfully, to flag its intentions.

US stocks were slightly higher on Tuesday as the meeting got underway, with the broad S&P 500 up 0.1 per cent, while the dollar was little-changed at US$1.1166 per euro and at 101.68 yen.
– AFP/de