News analysis

Fed leaves rates unchanged, says US economy improving News analysis

WASHINGTON • The Federal Reserve has left key interest rates untouched but acknowledged improved economic performance, suggesting a rate increase may still be on the horizon in 2016.

Policymakers had not been expected to raise rates, out of concern that a hike could stifle fragile growth. Their improving view on economic conditions left open the possibility of an increase in the benchmark federal funds rate, currently at 0.25-0.50 per cent, by December.

Putting behind the surprise downturn in job creation in May that had raised worries about the economy, the Federal Open Market Committee (FOMC), which sets the monetary policy, said employment and economic growth had grown moderately since its mid-June meeting.

It also appeared to see less threat to US growth from Britain's vote to leave the European Union, which took place a week after the last FOMC meeting.

"Near-term risks to the economic outlook have diminished," the FOMC said in announcing the outcome of the closely watched two-day meeting in Washington which ended on Wednesday.

Inflation rate hawks and doves had been split in June over how strong the economy was, and voted unanimously to hold off on raising rates until the situation became clearer.

The Fed has repeatedly said it wants to see increasing job growth and signs of stronger inflation before it raises rates.

While the latest statement cited moderate increases in growth in employment, it said inflation was expected to remain low in the near term.

As it had found in June, the committee said household spending was "growing strongly" while fixed investment from businesses remained "soft". But in a departure from its last meeting, the committee noted that payroll and other labour market data "point to some increase in labour utilisation in recent months".

Professor Tim Duy, senior director at the Oregon Economics Forum, said a rate hike at the next FOMC meeting in September could not be ruled out. "But it seems more likely that the critical mass of data to hike will not arrive until December," he said.

The US dollar slid against major currencies following the the statement. It was trading 104.85 yen from 105.31 yen in New York, and down 0.22 per cent against the Singdollar at 1.3505.

Most US stocks also fell, with the S&P 500 Index down 0.1 per cent to 2,166.58 at close. The Dow Jones Industrial Average finished with little changed, while the tech-heavy Nasdaq 100 Index rose 0.7 per cent.

AGENCE FRANCE-PRESSE, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on July 29, 2016, with the headline 'Fed leaves rates unchanged, says US economy improving News analysis'. Print Edition | Subscribe