Fed Expected to Maintain Steady Rates Amid Ongoing Inflation Concerns – Reuters

By Ann Saphir

SAN FRANCISCO – The U.S. Federal Reserve is anticipated to maintain interest rates at their current level during its upcoming meeting, postponing any potential increases until later this year, as policymakers await more substantial evidence of rising inflation.

At the Fed’s policy meeting scheduled for July 26-27, the key discussion will focus on how to align positive economic indicators, such as robust job growth in June, with a global economic slowdown and other challenges that could impact inflation levels.

San Francisco Fed President John Williams, who is part of the 17-member group involved in making rate-setting decisions, believes that a bit more assurance that inflation is moving towards the Fed’s 2 percent goal is needed.

Currently, the preferred inflation measure tracked by the Fed sits at 1.6 percent.

With monthly job growth significantly above what is required to keep unemployment from rising and a lack of productivity improvements, some Fed officials may advocate for an immediate rate increase to preempt a potential inflation surge.

"The danger is real, and you can be certain that the more hawkish members will be pushing for it," said Alan Blinder, a professor at Princeton University and a former Fed vice chairman. "I suspect they will be discussing September’s meeting in July."

Conversely, other officials like New York Fed President William Dudley have indicated a preference for waiting until there are clear signs of inflation before considering a rate hike.

"There’s little justification for raising rates until we see an increase in inflation," stated Kevin Logan, HSBC’s chief U.S. economist based in New York.

The U.S. central bank is set to release its latest policy statement at 2 p.m. EDT on Wednesday.

HEADWINDS

The Fed’s last adjustment to the benchmark overnight interest rate was in December, marking the first increase in nearly a decade, during which it announced plans for four rate hikes in 2016 to begin normalizing the extremely accommodative monetary policy implemented following the 2007-2009 financial crisis.

However, factors such as global economic headwinds, financial market volatility, and the uncertainties stemming from Britain’s exit from the European Union have caused the Fed to delay rate hikes and reduce its forecast for the year to two increases.

Still, assuming there are no major market shocks or significant negative turns in U.S. economic data, even those who advocate for a more cautious approach, like Dudley, have suggested that at least one rate hike this year remains plausible.

Following this week’s meeting, the Fed has three additional policy meetings planned for 2016—in September, November, and December. A rate increase in November is considered unlikely, given that the meeting occurs just one week prior to the U.S. presidential election.

Economists surveyed recently expect the Fed to keep rates unchanged until after the election.

"Normalizing rates has dropped in priority for the Fed and will likely remain so until stability returns to financial markets and the broader economy," Jefferies economists noted in a recent commentary.