Fed expected to keep interest rates unchanged after talk of potential hike

The Federal Reserve is expected to keep interest rates unchanged in a range of 0.25% to 0.5% when it concludes its two-day March meeting on Wednesday, putting off a planned rise after fears of a slowdown in China and collapsing oil prices have rattled investors worldwide.

Most economists expect Federal Reserve chair Janet Yellen to hint at two interest rate hikes to come later this year – down from four hikes that were expected back in December, when the Fed raised interest rates for the first time since 2006.

The US central bank’s rate hike was the first since the recession. At the time, Yellen said the economy “has come a long way” and that the Fed was going to proceed gradually. In the months since, the Fed has adjusted its outlook, signaling few interest rate hikes in 2016 as it continues to monitor the situation abroad – including volatile oil prices and uncertainty in China.

“The most prominent risk in January – the tightening in financial conditions at the start of the year – has receded,” wrote Goldman Sachs economists Zach Pandl and Jan Hatzius. “As a result, Chair Yellen will likely indicate that the committee remains on track to raise rates again next quarter.”

Goldman Sachs economists are not the only ones who expect the Federal Reserve to raise interest rates in the coming months. According to a recent Reuters survey, economists expect the next rate hike to come before the end of June, followed by one before the end of the year. About 60% of economists expect the next rate hike to come by mid-year.

“I strongly believe that the Fed’s expressed intentions to raise rates four times this year will not be met during this first meeting in 2016,” said Stephen Kalayjian, trader and co-founder of KnowVera. “While some reports show growth and strengthening of the economy, things aren’t as positive as they may appear. The truth is back in December our economy didn’t warrant the pressure of rising interest rates and we saw the repercussions of that and our economy is still struggling. The inflation target is still way under 2% and there is the likely downward revision to the Fed’s GDP growth forecast.”

Inflation is the main reason why some expect the Fed to hold off on raising the interest rates in the coming months. The US inflation remains below the 2% target set out by the Fed and is not expected to rise near 2% even by mid-2017.

When she testified in front of the US Congress in February, Yellen noted that US financial conditions have become less supportive of growth. Mainly, the Fed chair was concerned about the turmoil in the markets and said that if it were to continue, it could act as a brake on the economy and affect the jobs market. In January, the US unemployment rate dropped below 5% even as the number of jobs created in January fell short of expectations. By end of February, job creation was up once again and beat expectations with 242,000 jobs created.

Yet despite the potential risks to the US economy, such as uncertainty about the Chinese economy or the falling commodity prices, Yellen said “the economy is in many ways close to normal”.

Low oil prices, according to Yellen, translate to more money in the pocket of consumers. According to her, steady job creation and faster wage growth could support increase in consumer spending.

“Against this backdrop, the committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labour market indicators will continue to strengthen,” she said, not ruling out further rate hikes in the near future.

She also continued to stress that December’s rate hike were necessary. She said that had the Fed held off on raising interest rates for too long, it might have to raise them abruptly in the future.

“Such an abrupt tightening could increase the risk of pushing the economy into recession,” she said.

Powered by Guardian.co.ukThis article was written by Jana Kasperkevic in San Francisco, for theguardian.com on Wednesday 16th March 2016 06.00 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010


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