United States: Fed stays on hold in July but leaves the door open to rate increase this year
July 27, 2016
The Fed’s Open Market Committee (FOMC) held its two-day monetary policy meeting on 26–27 July and announced that the federal funds target rate would remain within the current range of between 0.25% and 0.50%—a widely expected decision. One result of note is that Esther L. George, President of the Kansas City Fed, dissented and voted in favor of a 25-basis-point rate hike. The dissent by George was hardly a surprise. She had already voted to raise the interest rate in March and April, but then joined the other nine FOMC members in June in voting to leave the interest rate unchanged.
In December last year, the Fed raised interest rates for the first time since July 2006 and at the 14–15 June meeting, the monetary authorities projected that the Fed’s funds rate would average 0.9% this year. This would necessitate two rate increases this year, though in the aftermath of the Brexit vote, markets began to price in a higher likelihood of only one interest rate increase or even none at all. Nevertheless, as the turbulence provoked by the result of the British referendum have begun to dissipate, the FOMC recognized in the July policy statement that the near-term risks to the U.S. economy had diminished, providing a more upbeat assessment than in June.
The FOMC also commented that the U.S. labor market had strengthened and that the pace of jobs creation had been solid in June. This was a marked contrast to its statement that month, when it had suggested that the labor market had lost steam and job gains had faltered. In June, 287,000 new jobs were created, which was well above the paltry 11,000 increase registered in May. Regarding consumer prices, the Fed still sees that inflation will remain low in the near-term, partly due to past declines in energy prices, but it expects it to converge to its 2.0% target in the medium term, as the declining impact of the fall in energy prices and the strengthening of the labor market should support strong growth in domestic demand.
The FOMC did not give a clear hint of the timing of the next rate hike, but the positive tone of the statement suggested that the U.S. monetary authorities see economic conditions becoming favorable for a rate increase as soon as September. The Fed has three meetings left this year: in September, November and December. The rising uncertainty regarding the coming U.S. presidential election in November could weigh on investor and consumer confidence, complicating the monetary authorities’ deliberations for a potential rate hike.
Author: Ricardo Aceves, Senior Economist