Barring a slide in the health of the American economy, US interest rates will rise in December after a divided Federal Reserve Open markets Committee left interest rates unchanged overnight.
Three of the voting members of the Open Markets Committee voted against the decision to leave the Federal Funds Rate on hold at last December’s range of 0.25% to 0.50%.
That is an unusually high level of dissent and no doubt led to the central bank sending a strong signal to markets to expect a rate rise by the end of this year.
The Fed said US economic activity had picked up and job gains were “solid” in recent months and “the case for an increase in the federal funds rate has strengthened,” the central bank said in its post meeting statement this morning,Sydney time.
It added that its rate-setting committee had decided against raising rates “or the time being,” until there was more evidence of progress toward its employment and inflation objectives.
The Fed’s “dot plot,” a scorecard of interest-rate predictions from the leading Fed members, reflected that hawkish bent with 14 of the 17 Fed officials seeing a rate increase by year-end.
Fed chair Janet Yellen said after the meeting the decision to sit and hold was based on in part on the recent weakening in the jobs market and continuing low inflation (its well short of the Fed’s 2% target).
The Fed’s decision came hours after the Bank of Japan had overhauled its monetary policy to target interest rates (See separate story).
The BOJ maintained its 0.1% negative interest rate, but abandoned its base money target. Instead, it set a “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields around their current zero percent.
US markets firmed in the wake of the Fed’s statement and comments from the chair. Major indices jumped with the gains rising in the last half hour of trading to 6am Sydney time.
The Dow jumped 163 points, or 0.9%, to close at 18,293, the S&P 500 index ended 23 points, or 1.1%higher, at 2,163. And the Nasdaq jumped 55 points, or 1%, at 5,295.18— a new record for the tech-heavy index, surpassing its close of 5,283.93 on September 7.
Our market will open around 30 points higher after trading overnight on the ASX futures market, with a solid gain after the Fed’s decision was announced.
The Aussie dollar gained around half a cent in the wake of the Fed announcement at 4am Sydney time. It was trading around 76.25 US cents.
December gold ended 1% higher at $US1,331.40 an ounce. In electronic after hours trading, it rose to $US1,334.80. Oil jumped back past $US45 a barrel in US markets in a reaction to a bullish weekly update from the US Government on American oil stocks (a third week of falling inventories). US gas prices meanwhile are still around 3 year highs.
As reported by Reuters the Fed trimmed its expected equilibrium interest rate to 2.9% from 3.0% (Reuters had reported it could fall to 2.75%). That’s the interest rate level the Fed reckons will be enough to keep growth on an ticking over.
The Fed’s new interest rate projection for 2017 left rates centred at 1.125%, down from 1.625 per cent in June. The median forecast was at 1.875% in 2018 and 2.625% for 2019.
The forecasts have changed in part because the Fed has reassessed its view of the economy’s longer term outlook and formed the judgment that rates will need to be lower to keep growth on an even keel.
The economic outlook is now seen as weaker than in the Fed’s last set of predictions in June.
Growth this year is now expected to be 1.8%, rather than 2% as predicted in June, and the longer-run growth rate was also trimmed to 1.8%. Core inflation is tipped to hit 2% in 2018, after running at 1.7% this year and 1.8% in 2017.
Later this morning the RBA’s new team of Governor, Phil Lowe and deputy, guy Debelle will front the House of Representatives Economics Committee in Sydney for their first appearance.
