The Federal Reserve on Wednesday continued to pave the way for an increase in interest rates as early as September.
The US central bank left its key interest rate unchanged at near zero – where it has been since the 2008 financial crisis – but once again signalled that rates will rise later this year.
While the Fed chair, Janet Yellen, has left little doubt that rates will rise this year, the Fed left itself wiggle room as it has set no timetable and said rates would only be raised if the economy continues to improve and unemployment continues to fall.
Many market watchers expect rates to be raised at the Fed’s next policy meeting on 16-17 September, when Yellen will hold a press conference. The central bank has another meeting scheduled for December.
Earlier this month, Yellen told Congress: “Our economy is in a much better state. Low interest rates have facilitated it, and a decision on our part to raise rates will say, ‘No, the economy doesn’t stink.’
“We’re close to where we want to be, and we now think the economy can not only tolerate but needs higher rates. So there have been headwinds, and we’ve tried to use monetary policy to overcome them.”
Tom di Galoma, head of rates trading at ED&F Man Capital, said: “The economy is improving, but they are not really saying that the economy is taking off here. If the Fed doesn’t raise rates in September, I think we’re looking at some time mid-next year.”
Wednesday’s statement pointed at improvements in the unemployment rate, consumer spending and housing. The language of the statement was little changed, but for the first time it pointed to “solid” job gains. The unemployment rate has fallen to a seven-year low of 5.3%. It continued to describe economic activity as expanding “moderately”.
The Fed said it still expects inflation to rise gradually toward its 2% target. It left unchanged its phrasing on raising rates “when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term”.
The committee has kept the benchmark overnight federal funds rate at a record low of 0-0.25% since December 2008 as the global economy struggled with the worst recession since the Great Depression.
Yellen has repeatedly stressed that when the Fed does raise rates it will do so only gradually. She has suggested that raising rates in small increments, followed by pauses, will let the Fed assess the effects of slightly higher borrowing costs.
US stocks spiked slightly after the Fed’s statement.
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