US interest rates to stay unchanged for at least two months, says Fed

Janet Yellen Seated

The Federal Reserve decided to hold steady and not raise US interest rates for at least another two months at its latest meeting, arguing that near-term risks to the US economy have diminished.

This is the fifth time that the Fed has decided against raising interest rates since December, when it raised interest rates for the first time in almost a decade. Federal interest rates remain unchanged at 0.25% to 0.5%.

Interest Rates chart

“We continue to expect the next tightening move to be in December. That said, the wording does not preclude a move in September; a lot can happen in eight weeks,” Jim O’Sullivan, chief US economist at High Frequency Economics, wrote in a note to investors.

The only dissenting member of the Federal Open Market Committee (FOMC), the Fed’s policy-setting committee, was Esther George, president of the Kansas City Fed. George has been advocating for higher interest rates for a some time, but voted to keep them unchanged in June after a disappointing jobs report found that just 38,000 jobs were created in May. That number was later revised to 11,000.

“Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months,” the US central bank said in a statement.

The news came as little surprise. Two different polls – one by Reuters and another by Wall Street Journal – found that economists expect the Fed to hold rates steady until after the election. The next rate hike is expected in December, if at all.

“Rate normalization has fallen down the Fed priority list and will remain there until the dust is well settled on the financial markets and the economy,” Jefferies economists predicted in a note last week.

But the decision to hold off on rates once more marks a dramatic shift in the Fed’s thinking from the start of the year. Originally, the Fed was expected to raise rates four times this year.

In addition to low inflation, the Fed said another reason for holding off on raising interest rates was “soft” business investment.

“Despite healthy corporate balance sheets and ample access to cash, businesses remain hesitant to invest in equipment, structures and high-wage, full-time employees. The longer this trend continues, the more difficult it will be for the US economy to expand beyond this stagnant 2% growth rate and the more challenging it will be for the Fed to justify a further adjustment to policy,” pointed out Lindsey Piegza, chief economist at investment banking firm Stifel. “After all, without business investment, job creation and by extension income growth and consumer spending will remain restrained.”

Second quarter earnings by companies like Starbucks, McDonald’s and Chipotle have indicated a decrease in spending by US consumers. Steve Easterbrook, chief executive of McDonald’s, said that consumers were spending less because they feel uncertain about their financial stability and the upcoming presidential election.

The Fed meets three more times this year – in September, November and December. The next meeting will take place on 20-21 September.

Powered by Guardian.co.ukThis article was written by Jana Kasperkevic in New York, for theguardian.com on Wednesday 27th July 2016 20.22 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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