Fed's non-action on rates show US economy not strong enough yet

United States Federal Reserve Chair Janet Yellen holds a news conference following the two-day Federal Open Market Committee meeting.
United States Federal Reserve Chair Janet Yellen holds a news conference following the two-day Federal Open Market Committee meeting.PHOTO: REUTERS

SINGAPORE - As expected, there were no major surprises at the Federal Open Market Committee (FOMC) meeting, with interest rates left unchanged and one increase in the United States Fed funds rate likely by December.

While Fed chair Janet Yellen has emphasised that the decision to leave rates on hold in September "did not reflect a lack of confidence in the US economy", analysts say that its recovery, while on track, isn't strong enough, with employment data and inflation still falling short of expectations.

Ms Yellen said that the decision to hold off raising rates reflected the fact that labour market slack is being absorbed at a slower pace than in previous years, and inflation is still below trend.

"The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives," the FOMC statement said.

Owing to weak growth in the first half of this year, the Fed trimmed its forecast for US economic growth in 2016 to 1.8 per cent from 2 per cent and dialled back the number of rate hikes to two next year from three.

Markets across Asia rallied as risk assets won favour again in light of the gradual approach to raising interest rates, and the prospect of only modest rises in the future.

"From a market standpoint, it's a shot in the arm when central banks don't raise rates, or keep them lower for longer. But lower for longer rates also mean difficulties for businesses as it implies that demand is weak," CIMB Private Bank economist Song Seng Wun said.

For export-dependent economies like Singapore, it's not great news if the US central bank is divided on the overall strength of the US recovery.

"The US economy is on the right path because unemployment is down, hiring is picking up. But it is not expanding as fast as the Fed had expected. The fact that the Fed decided not to raise rates shows there are concerns about the strength of US consumption," Mr Song said.

Further, the Eurozone is far from being impressive in growth, and the BOJ is worried about lacklustre growth and deflation in Japan. "So globally, growth is still falling short of expectations," he said.

He warned of possible further downgrades in world economic growth outlook for this year and next year, when the IMF issues its forecasts in October. "That could imply another 10-12 months of lacklustre growth for Singapore," he added.