All eyes on Federal Reserve as it prepares for interest rate announcement

Janet Yellen Chat

Under intense security and privacy, 12 people are gathering in Washington DC to make decisions that could change the lives of everyone in the US – and much of the rest of the world.

The Federal Open Market Committee (FOMC) will on Wednesday and Thursday thrash out a decision on whether to raise US interest rates, which have been held at near-zero since the 2008 financial crisis.

If rates do rise, it will likely lead to higher mortgage, car and personal loan and credit card rates in the US, and spark central banks throughout the rest of the developed world to also consider raising their interest rates.

For months, economists had been expecting a rate rise (dubbed “liftoff” by Fed officials) at this meeting, but their enthusiasm has waned markedly following last month’s global stock market panic over the health of the Chinese economy.

The decision will be announced by Federal Reserve chair Janet Yellen at a highly anticipated press conference in Washington on Thursday. Even if rates aren’t raised, every word that she says – and how it reflects the committee’s confidence in the US economy – has the potential to significantly move global markets.

The FOMC members, who are often in close agreement, appear to be deeply split about whether they think the economy can handle an increase in rates, which could put companies off investing and hiring more employees.

John Williams, an FOMC member and president of the Federal Reserve Bank of San Francisco, has been bullish about the strength of the US economy for most of the year but appeared much more cautious last week.

“All of the data that we have had up until now has been, I think, encouraging,” he said in an interview with the Wall Street Journal. “But there are some pretty significant – and I would say have now grown larger – headwinds that have developed.”

His counterpart from Minneapolis, Narayana Kocherlakota, is even less confident. “I don’t see a near-term increase in interest rates as being appropriate, and by near-term I mean really through the course of 2015,” he told CNBC at the recent central bankers jamboree in Jackson Hole, Wyoming.

Bill Dudley, the president of the New York Federal Reserve and the most important US central banker after Yellen, has also said the idea of raising rates this month isn’t as “compelling” as it was before the China-led stock market chaos.

On the other side of the table, Stanley Fischer, the Fed’s vice-chairman, has said recent “impressive” jobs growth – to the level the government considers effective full employment – creates a “pretty strong case” to raise rates in September. “We’re getting back to normal and at some point we will want to show that, by beginning to normalize interest rates,” he said recently.

Eric Rosengren, president of the Federal Reserve Bank of Boston, reckons employment conditions needed for a rate rise have “largely been met”, but he is less certain on inflation. “Recent reports on wages and salaries still show few signs that the tightening labor markets are translating to increases in wages and salaries consistent with reaching 2% inflation,” he said.

US prices have risen by 0.3% over the past year, and inflation has lingered below the Fed’s 2% target for more than three years.

Goldman Sachs analysts this week said in a report they expect rates to be left unchanged, but think the Fed will signal that “liftoff is near”.

ING economists said Thursday’s decision will be “the most eagerly awaited in years”, though they also expect rates to be left unchanged – “but this is a very close call”.

Powered by article was written by Rupert Neate in New York, for on Wednesday 16th September 2015 14.06 Europe/ © Guardian News and Media Limited 2010


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