US Fed rate hike looks a mirage; deferred till December

news
29 October 2015

The US Federal Reserve kept interest rates unchanged on Wednesday and deferred a planned hike in interest rates till its next meeting in December. Until then, the current rate for federal funds will continue, it said.

US Federal Reserve chair Janet YellenAnnouncing the decision, the Fed reaffirmed its view that the current 0 to 0.25 per cent target range for the federal funds rate remains appropriate to support continued progress toward maximum employment and price stability.

The Federal Open Markets Committee said it would determine whether it will be appropriate to raise the target range at its next meeting after assessing the progress - both realized and expected - toward its objectives of maximum employment and 2 per cent inflation.

The assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Also, the FOMC will look for further improvement in the labour market and ensure that inflation will move back to its 2 per cent objective over the medium term before deciding to raise the target range for the federal funds rate.

Investors had expected the Fed to hike rates as planned despite international pressure to keep rates at current levels so as to keep markets calm.

The Fed, however, downplayed recent global financial market turmoil and said the slower pace of growth in the labour market hadn't undermined its faith in the ability of the economy to create jobs.

Investors quickly shifted their expectations of a December hike, with rates futures contracts upping the chance of a move this year to 47 per cent from 34 per cent prior to the statement.

The Fed's policy-setting committee also noted that US job growth had slowed and the unemployment rate had held steady. It repeated in its statement that "underutilization of labour resources has diminished."

"The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced," the Fed said in its statement. It added that the US economy has been expanding at a moderate pace.

The Fed said it would maintain its accommodative policy by reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent, it added.





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