The Federal Reserve on Wednesday kept interest rates unchanged at their record low of near-zero, but raised the likelihood of a rate hike in December by dropping previous warnings about the fragility of the global economy.
Following a two-day meeting in Washington, Fed policymakers voted to leave rates at 0-0.25% – where they have been for the seven years since the financial crisis.
However, the bank’s Federal Open Market Committee (FOMC), which sets the rate, significantly raised the prospect of a historic rate rise at its next meeting in December by removing cautious statements about unstable international markets could adversely effect the US economy.
In September, following concerns about the health of the Chinese economy, the committee said: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
This was modified on Wednesday to: “The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments.”
The committee specifically pointed towards the possibility of raising rates at its December meeting – the last of 2015. “In determining whether it will be appropriate to raise [rates] at its next meeting, the committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2% inflation,” it said in the statement.
Nine out of 10 FOMC members voted to keep rates unchanged. That is the same proportion as in September with Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, being the only member to push for a 25 basis points increase.
Janet Yellen, the Fed’s chair, who did not hold a press conference on Wednesday, has previously said that she expects rates to be raised this year if the economy continues to improve.
In the statement the committee said “economic activity has been expanding at a moderate pace”. “Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft.”
But the Fed warned that the pace of job gains has “slowed”, while the unemployment rate held steady. It also repeated its warning that it wants to be “reasonably confident” that currently ultra-low inflation will rise to its 2% target before it raises rates.
Other central banks around the world are closely watching the Fed’s process and a decision to increase rates is likely to lead to rates being raised across the world.
James Knightley, a senior global economist at ING, said the changes to the language of the Fed statement were “small in number, but reasonably significant”.
“On the dovish side, the Fed acknowledges that ‘the pace of jobs growth has slowed’ versus being viewed as ‘solid’ in September,” he said. “However, the rest of the statement seems to try and put the most positive spin possible. Household and business spending is expanding at ‘solid rates’ whereas previously it was only described as ‘increasing moderately’.
“They have also removed three lines about global risks possibly restraining economic activity and depressing inflation. This seems a remarkable turnaround. Furthermore, the statement specifically adds that ‘in determining whether it will be appropriate to raise the target range at its next meeting …’ This suggests that the more hawkish element will be pushing hard for a December move should the data come in reasonably firm.”
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expected a December rate hike if the jobs reports for October and November show the US labour market is getting stronger. “Some combination of payrolls, unemployment and wages signalling continued improvement will be enough,” he said.
Financial markets, which are predicting a 34% chance of a rate hike in December, were virtually unchanged following the announcement. With the Dow Jones Industrial Average up 38.5 points (0.22%) to 17,620 points at 2.30pm ET.
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