Interest rates will stay near zero, Fed announces

For the last few months the Federal Reserve officials were of the opinion that the economy was gaining strength and therefore it will be able to tolerate the hike in the interest rate.

Hopes that interest rates might not go up until the first quarter of next year or even later had helped gold climb above US$1.190 at one point, but today it was US$5 lower at US$1,150.

In a statement after the meeting, the Fed pointed out that economic growth was “moderate”, while the inflation outlook was still poor. Chicago Fed President Charles Evans, a voting member of the FOMC this year, and Fed Governor Lael Brainard have both argued that the risk of raising interest rates too early outweighs the risk of waiting, given the limits of adding further stimulus with the policy rate so close to zero.

Rather than saying, as before, that global developments “may restrain (US) economic activity somewhat”, the committee simply said it is “monitoring global economic and financial developments”.

The Fed’s final meeting of the year is scheduled for December 15 and 16. It has to be immensely frustrating….

The FOMC also dropped a key line that appeared in the September policy statement showing a few worry about how the turmoil in global markets and China’s downturn would impact United States growth.

The Federal Reserve maintained that the economy was growing albeit modestly which continues to be a cause for concern.

“We may see more near-term volatility as the market prices in the Fed’s potential rate increase”, said Ken Taubes, head of USA investments at Pioneer Investments.

“I think when it comes to it, the markets will be able to cope just fine with a rate hike as it will suggest that the economy is recovering well and showing strong resilience at a time when other countries are really struggling”, said Craig Erlam, senior market analyst at Oanda, London. The central bank also downplayed recent global financial market turmoil which was the main reason for policy makers to refrain from a hike in September.

A few of the US weakness has occurred because of a global economic slowdown, led by China, that’s had wide-ranging consequences.

The USA central bank made the announcement Wednesday at the end of its two-day meeting. Wages and inflation are subpar.

USA crude oil futures shrugged off the stronger dollar and extended gains after soaring more than 6 percent overnight as the government reported an inventory build-up, which triggered a short-covering rally after three days of losses. Since then, hiring has significantly strengthened, and unemployment has fallen to a seven-year low of 5.1 per cent.