Federal Reserve paves way for possible December increase in rates

Despite almost seven years of uninterrupted job creation and a very low unemployment rate of 4.4%, inflationary pressures and wage gains have shown little sign of life, something that has baffled economists.

While traders saw virtually no chance that the Fed would raise U.S. overnight interest rates, the market was anxiously awaiting a statement from Chair Janet Yellen to determine whether the central bank plans to move forward with further rate hikes this year.

Tiffany Pollock, a forex and money market trader at Merchant West, said the Fed was likely to leave policy rates range unchanged and that market focus could rather centre on the language in the statement.

Investors had widely expected no changes to the Fed’s interest rate, which helps set the cost of borrowing and lending around the country.

“For the remainder of the year, we’ll continue to see inflation moving away from the target, so I don’t think they’ll raise rates anymore this year”, said Gregory Daco, chief USA economist at Oxford Economics in a phone interview.

The same can not be said about inflation however, which has not followed the Fed’s expected path.

“The weak dollar continues to put the Fed in a goldilocks environment where the market isn’t concerning itself with rates”, he says. Many economists think the Fed will begin shrinking its balance sheet sometime this fall.

The central bank will slowly trim its collection of bonds over the next few years, though the Fed said it’s unlikely to restore its balance sheet to pre-recession levels of around $US800 billion.

McBride said this shift could represent a “reprieve for credit card holders and home equity borrowers”, whose rates are more influenced by the Fed’s benchmark rate.

While there is no way of knowing what they will do, the “latest chatter suggests the (Fed policymakers) may tip their hat to September as the starting date for reducing the balance sheet”, said Stephen Innes, head of Asia-Pacific trading at Oanda.

The Fed has sought to assure investors that the process would be extremely gradual.

Just past the midway point of 2017, fiscal policy is very much on the back burner and monetary policy is in the spotlight once again.

The United States Federal Reserve – probably the most important central bank in the world – holds eight regularly scheduled policy meetings a year, and its fifth of the year is due to be held tomorrow and on Wednesday.

There were remarks that overall inflation have declined and are running below 2.0%, but the committee still expects inflation to stabilise around the 2.0% objective in the medium term.

In June, Yellen and other officials sought to explain away the unwelcome slip in inflation as a result of such onetime factors as a plunge in consumer cellphone charges and a dip in prescription drug prices.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence. In a move largely expected in financial markets, the policymaking Federal Open Market Committee (FOMC) agreed to keep its benchmark rate target at 1-1.25%.

US crude CLc1 jumped 1.6 percent to $47 a barrel, after closing up 1.25 percent on Monday.

Leaders of the USA central bank said Wednesday that they were holding their benchmark lending rate at a low level – in a range between 1 and 1.25 percent – for the time being. He voted against the quarter-point rate increases in March and in June.