WASHINGTON • The Federal Reserve kept interest rates unchanged on Wednesday in its last policy decision before the United States elections, but signalled that it could hike them next month as the economy gathers momentum and inflation picks up.
The US central bank said the economy had gained steam and job gains remained solid. Policymakers also expressed more optimism that inflation was moving towards their 2 per cent target.
"The committee judges that the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress towards its objectives," the Fed said in a statement following a two-day meeting.
That suggests the bar is low for a rate increase at the Fed's final policy meeting of the year in the middle of next month, which has largely been factored in by financial markets.
"You are still pointing to a December hike. They just didn't pre-commit to it," said Mr John Canally, investment strategist and economist for LPL Financial in Boston.
In the statement, the Fed's increasing confidence that prices were moving higher was reflected in its view that "inflation has increased somewhat since earlier this year" and in the removal of its previous reference to inflation remaining low in the near term.
Policymakers have increasingly converged on the likelihood of a hike next month.
In September, Fed chair Janet Yellen said that a move before the year end was likely as long as US employment and inflation continued to strengthen.
Since then, job gains have continued at a solid rate and inflation has ticked higher, putting both close to the Fed's long-run targets. The economy also has gained momentum, growing at a 2.9 per cent annual pace in the third quarter after a fairly sluggish first half.
Investors had all but discounted an increase in borrowing costs this week ahead of the US elections next Tuesday.
The Fed has held its target rate for overnight lending between banks in a range of 0.25 per cent to 0.5 per cent since last December, when it raised borrowing costs for the first time in nearly a decade.
Kansas City Fed president Esther George and Cleveland Fed president Loretta Mester dissented in Wednesday's decision in favour of an immediate hike. They were among three policymakers who dissented at the last meeting in September.