Fed leaves interest rates unchanged, delays monetary tightening

28 July 2016

Janet YellenThe US Federal Reserve on Wednesday left its policy interest rates unchanged but stuck to its oft repeated stance that near-term risks to the US economic outlook have diminished, opening the door to a resumption of monetary policy tightening this year.

The Federal Open Markets Committee at its meeting on Wednesday decided to maintain the target range for the federal funds rate at 0.25 to 0.50 per cent. The FOMC said the monetary policy stance would support further improvement in labour market conditions and a return to 2 per cent inflation.

The Fed's preferred inflation rate currently stands at 1.6 per cent and has been below target for more than four years. And with no immediate chance of inflation reaching the 2 per cent target level, any hike in policy interest rate also remains a distant possibility.

It said inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 per cent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labour market strengthens further.

According to the FOMC, near-term risks to the economic outlook have diminished and much will depend on the evolving global economic and financial developments.

The US economy had expanded at a moderate rate and job gains were strong in June. It added that household spending also had been ''growing strongly,'' and pointed to an increase in labour utilisation.

The Fed said it will maintain its existing policy of 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, maintain accommodative financial conditions.

While Fed policymakers said they continued to closely monitor inflation data and global economic and financial developments, they indicated less worry about possible shocks that could push the economy off course.

The policy-setting committee will now meet at the beginning of November, but a rate hike at that time also unlikely especially since it comes before the US presidential election.

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