Thursday, July 19, 2018
Business

Fed keeps key rate unchanged but hints of coming hike

WASHINGTON — The Federal Reserve is keeping a key interest rate unchanged but sending a strong signal that it will likely boost rates before the end of the year.

The Fed said in a statement Wednesday that the U.S. job market has continued to strengthen and economic activity has picked up.

It characterized the near-term risks to the economic outlook as "roughly balanced." It was the first time it has used that wording since last December, when it last raised rates. Most analysts have said they think the Fed will next raise rates in December.

For the first time in nearly two years, there were three dissents to the Fed's statement Wednesday.

Until recently, many Fed watchers had thought a rate hike was likely this week. They believed that the Fed, starting with a late-August speech by Chairwoman Janet Yellen in Jackson Hole, Wyo., was preparing investors for an imminent increase.

Yellen suggested then that given the job market's solid gains and the Fed's outlook for the economy and inflation, "the case for an increase in the federal funds rate has strengthened in recent months."

Other Fed officials, including Vice Chairman Stanley Fischer, made similar observations, seemingly part of a collective signal that a September rate hike was probable if not definite.

Sentiment shifted, though, after Lael Brainard, a Fed board member and Yellen ally, laid out the case for delaying a resumption of rate increases for now. Brainard's comments, coupled with a string of weaker-than-expected economic data, led watchers to conclude that there will likely be no rate increase this week.

Still, many analysts had expected the statement the Fed released Wednesday to signal that modestly higher lending costs were coming soon — in part to satisfy the growing number of Fed officials who have pushed for a resumption of rate increases.

Some economists had pointed to the minutes of the Fed's July meeting and comments from officials since then to suggest that the central bank's "hawks" — those who think it should be acting faster to raise rates — are gathering adherents from the dove camp. Doves tend to be wary of raising rates quickly for fear for undermining growth.

Others said that members of the dove camp, who include Yellen, weren't yet convinced, especially after the recent string of tepid readings on the economy.

Job growth slowed in August. A manufacturing gauge slid back into recession territory. An index that tracks the services economy, where most Americans work, fell to its lowest level since 2010. U.S. shoppers retreated in August to depress retail sales after four straight monthly gains.

These were signs, too, that the economy might be struggling to accelerate after three straight quarters of anemic growth.

And perhaps most critical for some Fed officials, inflation has yet to make significant progress in rising toward the central bank's 2 percent target range.

The Fed's statement Wednesday was issued hours after the Bank of Japan, struggling to rejuvenate an ailing economy, set a more ambitious goal for raising inflation and announced steps meant to raise the profitability of financial firms.

Analysts expressed doubt, though, that the Bank of Japan's new target would change the mindset of shoppers and businesses long used to a stagnant economy and flat or declining prices. They said they expected Japan's central bank to eventually slash its policy rate further.

In Europe, Mario Draghi, head of the European Central Bank, is seeking help from the governments of the 19 counties that use the euro currency. The ECB this month left its aggressive stimulus measures unchanged and urged European governments to spend more on infrastructure and to enact reforms to make their economies more efficient and business-friendly. The eurozone economy is growing slowly, but inflation remains well far below the ECB's 2 percent annual target.

The Bank of England also decided to keep British rates unchanged last week. The United Kingdom's economy is holding up better than expected after British voters voted in June to leave the European Union. The Brexit decision caught markets by surprise and generated alarm about the prospects for Britain's economy. In August, the Bank of England cut rates and expanded its stimulus program. But it decided leave its main rate unchanged this month.

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