US Federal Reserve holds interest rates steady


23 September, 2017

As a result of the economic projections, policymakers on the rate-setting Federal Open Market Committee (FOMC) left U.S. benchmark interest rates steady within a range of 1-1.25 percent - a move that was widely expected by analysts.

The Federal Reserve voted Wednesday to keep key interest rates unchanged after two days of policy meetings in New York City. The Fed notes that it remains committed to its current policy of maintaining an inflation rate of 2 percent and low unemployment numbers. Benchmark 10-year notes fell 11/32 in price to yield 2.29 percent, up from 2.24 percent before the Fed's statement and the highest level since August 8.

Another rate hike is unlikely this time around as the disruptions caused by Hurricanes Harvey and Irma have distorted the overall picture of the USA economy (witness the spike in initial jobless claims in what has been an otherwise uninterrupted downtrend).

It cited past experience which has shown that "the storms are unlikely to materially alter the course of the national economy over the medium term". The Fed reiterated that interest rates are likely to rise at a "gradual" pace, though updated forecasts indicated that officials see the path as less steep than before.

After months of careful guidance, the Federal Reserve signalled on Wednesday it was to begin the mammoth task of unwinding its balance sheet in October, while also signalling that it still expects to raise interest rates one more time this year.

It forecasts only two increases in interest rates in 2019 and one in 2020.

The decision comes as the USA central bank sees economic activity "rising moderately," with a labor market that "continued to strengthen" creating "solid" job gains since the Fed's last meeting in July. The Fed's preferred price gauge rose 1.4 per cent in July from a year earlier.

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The central bank said Wednesday that it reduced its longer-term projection for its federal-funds rate.

The Fed signaled in June that it would begin to reduce a portion of its $4.5 trillion in holdings in U.S. Treasurys and mortgage-backed securities (MBS) that were largely accumulated during a bond-buying stimulus program after the Great Recession.

Any damage in the markets could extend to other assets, such as stocks, which have set record highs as investors have shifted money into stocks and away from low-interest bonds.

Still, officials seem to be prepping markets for the possibility of a rate increase. It has raised rates three times since last December, twice this year.

The renewed volatility in the rand would likely be a concern for the Reserve Bank's monetary policy committee (MPC), which os widely expected to cut the repurchase rate by at least 25 basis points on Thursday.

But the Fed isn't all that confident about the inflation outlook - like central banks elsewhere (including Australia) the weak inflationary pressures and weak wages growth amid strengthening labor markets is not found in the textbooks.

"In the longer run, we may see government infrastructure spending in the areas most affected, a move that will provide some small fiscal stimulus".

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