United States: Fed postpones interest rate hike amid concerns over global economy
September 18, 2015
At its 16–17 September policy meeting, the Fed’s Open Market Committee (FOMC) refrained from announcing an interest rate hike amid concerns over the impact of global economic developments. The Fed recognized that the U.S. economy has continued to expand at a moderate pace, but noted that weak global growth and financial market volatility are weighing on the domestic growth outlook and are likely to put downward pressure on inflation in the coming months. While uncertainty over issues abroad prompted the Fed’s decision to postpone a lift-off once again, analysts have not ruled out the possibility of an initial rate hike being made later this year. The Fed has two more meetings scheduled this year, in October and December.
Most of the Fed’s accompanying statement was little changed compared to the preceding meeting. Monetary authorities pointed out that the economy is making slow but steady progress, with the latest data showing further gains in the labor market and declining unemployment. Growth in household spending and business investment has increased, although exports remain in a soft patch. A significant addition compared to previous statements was a reference to the potential negative impact of global economic events on the ongoing recovery at home. Oddly, the Fed raised its median GDP growth projection for this year to 2.1% from 1.9% in June, although this was presumably driven by a stronger than expected result in Q2. The Fed revised downward its growth projection for 2016 from 2.5% in June to 2.3%.
In terms of price developments, the Fed explained that inflation has, “continued to run below the Committee’s longer run objective,” due to the effect of low energy prices and weak prices for imported goods. Market-based measures of inflation are low and survey-based measures of longer-term inflation expectations remain stable. The effects of lower energy and import prices are projected to dissipate and inflation is still expected to rise toward 2.0% over the long term. However, the Fed emphasized that developments abroad may put downward pressure on inflation in the near term. Committee members cut their inflation forecast for this year from the range of 0.6%-0.8% projected in June to 0.3%-0.5%.
In order to continue fostering growth in the economy and stoke inflationary pressures, the FOMC confirmed that the federal funds target rate would remain within the current range of between 0.00% and 0.25%. The Fed remains confident that this accommodative policy will help economic output stay on an expansionary path, further strengthen the labor market, and help mitigate the spillover effects from troubled global markets.
Looking forward, the Fed emphasized once again that the decision to hike the rate still depends on the assessment of a “wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” The Committee stated that it will not raise rates until there have been further improvements in the labor market and until it is “reasonably confident that inflation will move back to its 2.0% objective.”
While the Fed continues to affirm that its decision is dependent on economic developments, the stage still appears set for a rate hike later this year. In a supplementary document released after the meeting, 13 of 17 committee members projected that it would be appropriate to make a rate policy change some time this year, although this was down from 15 of 17 members at the previous meeting in June. Regardless of when a first rate hike is implemented, the pace of subsequent rate hikes is expected to be quite gradual. The FOMC’s median projection for the federal funds rate at the end of this year is 0.4%, down from the 0.6% projected in June.
Author: Carl Kelly, Economist