Fed Leaves Rates Unchanged, Citing Reduced Risks to Outlook – Reuters

By Lindsay Dunsmuir and Howard Schneider

WASHINGTON – The Federal Reserve maintained its current interest rates on Wednesday, indicating that the near-term risks to the U.S. economic outlook have lessened, which paves the way for a potential resumption of monetary policy tightening later this year.

During its meeting, the U.S. central bank observed that the economy was growing at a moderate pace, with strong job gains reported in June. They noted robust household spending and highlighted an uptick in labor utilization.

Fed officials remarked that they continue to monitor inflation data along with global economic and financial trends but expressed reduced concerns regarding possible shocks that could disrupt economic stability.

"Near-term risks to the economic outlook have diminished," stated the Fed’s policy-setting committee after a two-day session that left its benchmark overnight interest rate within the range of 0.25 percent to 0.50 percent.

However, the Fed acknowledged that inflation expectations have remained largely unchanged in recent months and did not provide a clear indication as to whether it would implement a rate hike at its next meeting in September.

Most policymakers have advocated for caution in increasing rates until there is tangible progress in aligning inflation with the central bank’s 2 percent target.

"It’s somewhat more hawkish, but not significantly so," commented Walter Todd, chief investment officer at a financial firm in South Carolina.

The Fed’s favored inflation measure currently stands at 1.6 percent and has lingered below the target for over four years.

Following the Fed’s announcement, U.S. Treasury prices pulled back from gains, while the U.S. dollar briefly strengthened against the euro and yen. U.S. stocks initially extended declines but later settled to trade largely flat during the session.

Traders in Federal funds futures indicated nearly equal chances for a rate increase at the Fed’s December meeting, with about a 20 percent likelihood for a move in September—slightly down from prior estimates.

The committee is also scheduled to meet at the beginning of November, though a rate hike then is generally considered unlikely due to its timing just a week before the U.S. presidential election.

A recent poll of economists suggested that most expect the Fed to hold off on raising rates until December.

"There was no indication that the Fed will raise rates in September," noted Mike Materasso, co-chair of a fixed income policy committee. "An increase this year seems reasonable, most likely at the end of the year, but is heavily dependent on stability in the global arena."

Kansas City Fed President Esther George was the sole dissenter at this week’s gathering, having pushed for rate increases in three of the past four meetings.

FOCUS ON DATA, YELLEN

Since raising rates for the first time in nearly a decade in December, the Fed has kept them steady, adjusting its previous projection of four rate hikes down to two for this year after reviewing long-term growth forecasts for the U.S. economy.

The central bank has faced challenges from a global economic slowdown, market volatility, and uncertainties following Britain’s June referendum to exit the European Union, which had led them to postpone further rate hikes.

To date, the initial impact of the ‘Brexit’ vote on the U.S. economy has been minimal. Recent economic data has exceeded expectations and financial conditions have improved, calming previous anxieties.

Fed officials are now turning their attention to the upcoming release of the initial GDP estimate for the second quarter, expected to reveal a healthy rebound from the previous quarter. Forecasts suggest that the economy may have grown at an annualized rate of 2.3 percent during this period.

The closely monitored U.S. monthly employment report will be released on August 5, followed by a speech from Fed Chair Janet Yellen at an annual central banking conference in Jackson Hole, Wyoming, later in August. Historically, Fed officials have utilized this conference to signal central bank policy directions.