The Fed Sees 'Diminished Risks' In The Economy, Keeps Interest Rates Steady

Jul 27, 2016
Originally published on July 27, 2016 3:39 pm

The Federal Reserve has voted to keep interest rates where they are, but noted that "near-term risks" to the economy have diminished, a sign that a hike is on the horizon.

As was widely expected, the Federal Open Market Committee decided to keep the target for the federal funds rate at a quarter to a half percent. However, a statement released Wednesday afternoon sounded decidedly more optimistic about the economic outlook.

The statement said business investment has been soft, but household spending "has been growing strongly" and there had been "some increase in labor market utilization in recent months."

Translation: Despite a weak unemployment report in May, the labor market continues to get better and job gains were strong in June.

The statement did not indicate when a rate hike might be coming.

"As expected ... there are no hints, nods or winks regarding the timing of the next rate hike," said Ward McCarthy, chief financial economist at Jeffries & Co. He said the Fed "continues to have an undefined timetable for the next rate hike in the normalization process."

In fact, Fed officials noted that inflation continues to be low, partly because of falling energy prices, which suggests they feel no pressure to raise rates anytime soon.

But the tone of the statement suggests a rate increase could be coming before the end of the year, perhaps as early as the next meeting, on Sept. 20-21.

"Markets had been slowly pricing in a higher likelihood of a rate hike by the year-end and have returned to pre-Brexit expectations in recent day, Rob Carnell, chief financial economist at ING, told The Financial Times.

"But judging by the text of the accompanying statement to the Fed decision, it looks as if they are trying to prepare markets for a hike far sooner than markets have been expecting."

Scott Anderson, chief economist at Bank of the West, says the statement puts a September rate hike back on the table, but he noted:

"The FOMC would need to see further upside surprises on U.S. jobs and economic growth, an improved global outlook, and more signs that inflation expectations are starting to normalize from currently low levels. There may be more evidence of this by the September FOMC meeting, but the evidence might not be definitive for a majority of FOMC members."

Once again, the lone dissenting voice in the vote was Esther George, president of the Federal Reserve Bank of Kansas City, who wants to see rates increased immediately.

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