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Friday 17

August, 2018 5:44 PM



US Fed highlights strong economy, leaves rate untouched

US Fed highlights strong economy, leaves rate untouched

The Federal Reserve on Wednesday highlighted the strength of the US economy and labor markets, a signal confirming interest rate increases are ahead, even as it held its fire for now.

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02.08.2018 08:36 AM

The Federal Reserve on Wednesday highlighted the strength of the US economy and labor markets, a signal confirming interest rate increases are ahead, even as it held its fire for now.

Financial markets already expect an increase in the benchmark lending rate in September but the Fed's word choices are likely to solidify expectations for a fourth hike in December.

Economists scrutinize every word of the Fed's statements for clues about the next move, so the changes could be significant, especially coming amid low unemployment, hefty monthly job gains and surging growth in the second quarter.

The signal the Fed will continue its gradual rate increases is unlikely to please President Donald Trump, who publicly chastised the central bank last month, saying policy was undercutting his efforts to juice the economy.

The central bank's policy committee said "economic activity has been rising at a strong rate," since the last meeting in June as the job market continues to strengthen.

In the statement in June, the committee described the economy as growing at a "solid rate." 

The statement also noted household spending had "grown strongly," while it last described things as having "picked up."

The Fed once again said it expected to continue "further gradual increases" in the overnight lending rate it charges to banks.

Putting doubts to bed

That will remove stimulus from the economy but is consistent with continued economic growth and job gains while keeping inflation near the Fed's two percent target over the medium term, the statement said.

"If you had any doubts about a rate hike in September, you can put those to bed," economist Joel Naroff said in a note. 

And, he said, "Given the Fed's evaluation of current and future growth, rate hikes are likely in September, December and possibly as many as four more next year, unless the economy decelerates sharply."

RDQ Economics said the upgrade to the Fed's language given strong economic data recently, but said it did not change the outlook for the central bank. The key 10-year US Treasury note hit the three percent mark after the decision.

"With the unemployment rate low, inflation near the target, but policy still accommodative, we continue to expect the Fed to hike two more times this year."

The stock market did not like the statement, with the Dow dropping to its lowest point of the day just after the announcement but recovering some ground after, also concerned about the Trump administration to ramp up pressure on China by considering tariffs of 25 percent rather than 10 percent on the next $200 billion of goods targeted.

The Fed did not mention the trade tensions in the statement but cited it in the discussions in June as a factor that could undermine strong business confidence and investments.

The exchange of tariffs has led to rising prices for goods like steel and aluminum, and companies continue to fret about the uncertainty created by the disputes.

The vote to hold rates unchanged for now was unanimous and comes after the economy grew 4.1 percent in the April-June quarter, while inflation has crept up just above two percent and wages at long last are beginning to accelerate.

Economists do not expect the US economy to continue to expand at the same pace for the rest of the year and the outlook is clouded by Trump's trade confrontations with multiple countries.
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