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Fed leaves key rate unchanged but hints at upcoming hike

A television monitor on the floor of the New York Stock Exchange shows the decision of the Federal Reserve on Wednesday. The Federal Reserve is leaving interest rates unchanged just days before Americans choose a new president, but hints again that it will likely raise rates at an upcoming meeting. [Associated Press]

A television monitor on the floor of the New York Stock Exchange shows the decision of the Federal Reserve on Wednesday. The Federal Reserve is leaving interest rates unchanged just days before Americans choose a new president, but hints again that it will likely raise rates at an upcoming meeting. [Associated Press]

WASHINGTON — The Federal Reserve left interest rates unchanged Wednesday, six days before Americans choose a new president, but hinted that it would raise rates soon, possibly in December.

The Fed said the case for a rate hike has "continued to strengthen" as the job market and economy have improved. And it observed for the first time that inflation has risen since earlier this year, closer to its target rate, and that it no longer thinks inflation will stay low over the next couple of years.

Taken together, the Fed's assessment suggested that it feels the economy has grown sturdy enough for it to resume withdrawing the extraordinary aid it provided during the Great Recession. The Fed began raising its benchmark rate in December after having kept it at a record low near zero for seven years.

Most Fed watchers expect a rate increase at the central bank's next meeting in mid-December — a step that would likely lead to some higher loan rates for consumers and businesses.

The statement the Fed issued Wednesday after its latest policy meeting said nothing explicit about considering a rate increase at its "next meeting" — words it had used last year before it raised rates in December. But its description of a strengthening job market, rising consumer spending and improved economic growth suggested that a rate increase is near.

"This shift in language supports the view of the next hike occurring at the December meeting," said Drew Matus, an economist at UBS.

The Fed further indicated it's closer to raising rates by saying it needs to see only "some further evidence" of economic progress.

"The bar for action has been moderately reduced with the insertion of the word 'some," ' said Carl Tannenbaum, chief economist at Northern Trust and a former Fed official.

"The timing was poor for an actual move this time because we have a little election coming up next Tuesday," Tannenbaum said.

He noted that chairwoman Janet Yellen is scheduled to hold a news conference after the Fed's next meeting Dec. 13-14. That will provide a platform for her to explain any action the Fed takes then and perhaps provide guidance on how many further rate increases are probable in 2017.

"When the tightening comes, likely in December, Janet Yellen will want to pair the increase with some context suggesting that rates may not increase again very soon" — a message that might calm financial markets, Tannenbaum said.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a research note Wednesday that "only a shock — the election of Trump, or an external geopolitical or market event — can now prevent a December hike."

As before, the Fed noted that the job market has continued to strengthen and that economic activity has picked up.

Analysts suggested that whether the Fed raised rates this week or not until mid-December would make little economic difference. With inflation still running below the Fed's 2 percent target, some Fed officials have said they think they have room to continue pursuing an extremely gradual approach to rate increases

Wednesday's decision was approved on an 8-2 vote, with two regional bank presidents — Esther George of Kansas City and Loretta Mester of Cleveland — casting the dissenting votes. Both wanted to raise rates now. The two had also dissented at the September meeting, along with Eric Rosengren of the Boston regional Fed.

The Fed's years of ultra-low short-term rates were credited by many analysts with rejuvenating the economy after the recession and the 2008 financial crisis. When the Fed finally raised rates modestly in December last year, most economists and the central bank itself foresaw multiple rate increases in 2016. But economic weakness and market turmoil in China and Europe and a slowdown in U.S. growth have since kept the Fed on the sidelines.

In the meantime, from job growth to home purchases, the U.S. economy has been demonstrating its resilience seven-plus years after it began recovering from the recession. The economy grew at a respectable 2.9 percent annual pace in the July-September quarter, the government estimated last week.

The unemployment rate is 5 percent, typical of a healthy economy, down from 10 percent in 2009. The housing market, whose meltdown triggered the 2008 financial crisis and the recession, has largely recovered.

Fed leaves key rate unchanged but hints at upcoming hike 11/02/16 [Last modified: Wednesday, November 2, 2016 4:29pm]
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