Fed leaves rates unchanged but upgrades view of the US economy to ‘strong’

6th Aug 2018

The Federal Reserve upgraded its assessment of the U.S. economy Wednesday but decided to skip another interest rate increase for now.

In a widely expected move, the central bank’s policymaking Federal Open Market Committee voted unanimously to keep the target range for its benchmark rate at 1.75 percent to 2 percent.

However, the committee is widely expected to approve an increase at the September meeting and a tweak in the language from the post-meeting statement could be a nod toward more monetary policy normalization.

The statement said the labor market has “continued to strengthen,” language consistent with the June meeting.

However, the committee went on to note that “economic activity has been rising at a strong rate,” a more bullish view than the June characterization of “solid” growth.

In addition, the statement noted that household spending and business fixed investment have “grown strongly.” That, too, is an improvement from June’s characterization that household spending has “picked up.”

The tweaks come days after the government said GDP grew at a 4.1 percent rate in the second quarter, the fastest in nearly four years. In addition, the unemployment rate is near a generational low at 4 percent, though manufacturing data released Wednesday pointed to concerns about the impact that tariffs would have on activity. The Fed statement made no mention of the tariff battle in which the U.S. is engaged with its global trading partners.

“It is going to be interesting to watch the Fed’s communications between now and September, when we expect the central bank to deliver a third hike of 2018,” James McCann, Aberdeen Standard Investments senior global economist, said in a note. Chairman Jerome Powell “has already attracted the ire of the President for raising rates. This political interference is clearly unhelpful but may return as September approaches.”

Policy remains ‘accommodative’

There were no other substantial changes in the statement. The committee noted that its policy remains “accommodative” and said inflation continues to progress near the Fed’s 2 percent goal.

But multiple Fed officials, including Chairman Jerome Powell, have sent indications that two more interest rate hikes are coming before the end of the year.

Traders in the fed funds futures market are indicating a 91.4 percent chance of a September increase and a 68.2 percent probability for another move in December, according to the CME’s tracker. They would come on top of previous hikes in March and June.

However, the Fed of late has run into some significant political resistance.

President Donald Trump, in a recent CNBC interview, bemoaned the central bank’s desire to keep up with its gradual but consistent move to resume normalizing policy. The Fed has been on a rate-hiking cycle since December 2015, after keeping the funds rate near zero for seven years.

Trump said he is worried that rate hikes could stymie growth that only recently has broken out of its post-recession slumber.

There was no indication in the statement of discussions regarding the president’s historically unusual remarks, and most observers believe the Fed won’t be swayed by presidential rhetoric.

Fed officials “essentially ignored the recent pressure from President Trump to slow down or pause the rate hikes that have been supporting dollar strength,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, said in a note.”

Minutes released in three weeks will give more insight into how FOMC members view the economy.

The meeting decision came the same day that the Atlanta Fed raised its third-quarter GDP forecast from 4.7 percent to 5 percent. Though the reading is preliminary and almost certain to change, such growth would only fuel the Fed’s desire to keep moving rates higher.

Committee members in June estimated that GDP would rise 2.8 percent for the full year before moderating to 2.4 percent in 2019 and 2 percent the following year and then settle into a longer-run pattern of 1.8 percent.

Trump administration officials reject that sentiment, believing that their economic program of lower taxes and regulation coupled with higher spending can sustain growth of at least 3 percent.

Source: CNBC