Fed blusters and delays US interest rate hike

 

The long awaited Federal Reserve decision to fire up US interest rates with another hike turned out to be a damp squib yet again. Fed chair Janet Yellen and her team of policymakers have hinted that the time is right to ratchet up the rate since the last rise from 0.25% to 0.5% in December 2015.

Despite sending signals and blowing smoke about putting interest rates up, the Fed has done nothing this year. The rate-setting committee only meets three more times before Christmas, including November when the USA goes to the polls to elect a new president. Traditionally, the Fed is unlikely to make such a major economic change.

Yellen, economists and commentators have talked about two rate rises this year, which leaves little option – if the rates going to rise then it will be September, October or December.

No one has a clue about rate rise

The non-event has left everyone trying to read between the lines about how the Fed will vote in the coming months. The only certainty is no one knows, probably not even the committee that makes the decision.

In a statement, the Fed explained that the economy was doing well, with household spending up and the jobless total down. Inflation is still below the Fed target of 2%, hovering around 1.6%.

“Risks that could affect the economy in the near-term are diminishing,” said the statement. Bank of England governor Mark Carney has suggested a UK rate rise is unlikely this year, and did the opposite, a rate cut from 0.5% to 0.25%.

No negative rates expected

He has regularly dismissed talk of a negative rate and tends to favour more monetary easing to oil the economy. Economies that have a negative rate already are still showing sluggish growth and low inflation – these include the Eurozone, Japan and Switzerland.

Only the US and Britain are considered as economies likely to raise interest rates as both are the only developed economies powering ahead. Both the Fed and the Bank of England are sitting tight waiting to see how the uncertainty of Brexit may affect their future positions.



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