United States: Fed keeps rates unchanged and heads toward December hike
November 2, 2016
At its 1–2 November monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) refrained once again from making any changes to the interest rate, but it used the monetary policy statement to lay the foundations for a rate hike at its next meeting in mid-December. The decision was widely expected as neither analysts nor investors saw the Fed hiking interest rates ahead of the presidential election.
The Fed’s accompanying statement at the latest meeting in November was not substantially changed compared to previous statements. In fact, it was not necessary for the Fed to make major changes to the November announcement, as the September statement had already been considered quite hawkish by market participants. It said that the case for a rate hike “has continued to strengthen” and that officials will, "for the time being, wait for some further evidence of continued progress toward its objectives.” The FOMC also repeated its previous view that the U.S. labor market has continued to improve and economic growth has picked up from the "modest pace" seen in the first half of the year.
In terms of price developments, the Fed explained this time that inflation “has increased somewhat since earlier this year”, although it acknowledged that it remains below the Committee’s 2.0% long-run objective, partly because of declines in energy prices and in prices of non-energy imports. In addition, the monetary authority stated that, although market-based measures of inflation are still low, they are moving up, and survey-based measures of longer-term inflation expectations remain stable.
Following the events on 8 November, markets were agitated in the wake of Donald’s Trump election win. However, the Federal Reserve appears to be sticking to its message regarding monetary policy, as one top official put the possibility of an interest rate hike in December on the table. In a question-and-answer session with the press, Stanley Fischer, Vice-chair of the Fed, stated that the case for gradually removing the monetary stimulus was “quite strong”. Fischer also suggested that the Fed would welcome greater fiscal support, amid signs that president-elect Donald Trump and a Republican-dominated Congress are preparing for tax cuts and infrastructure investment, which, if implemented, are likely to provide short-term stimulus to the economy and increase inflation.
Author: Ricardo Aceves, Senior Economist