Fed keeps rates steady, signals one hike
by end of year
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[September 22, 2016]
By Jason Lange and Howard Schneider
WASHINGTON (Reuters) - The U.S. Federal
Reserve left interest rates unchanged on Wednesday but strongly signaled
it could still tighten monetary policy by the end of this year as the
labor market improved further.
Fed Chair Janet Yellen, speaking after the central bank's latest policy
statement, said U.S. growth was looking stronger and rate increases
would be needed to keep the economy from overheating and fueling high
"We judged that the case for an increase has strengthened but decided
for the time being to wait," Yellen told a news conference. "The economy
has a little more room to run."
Yellen said she expected one rate increase this year if the job market
continued to improve and major new risks did not arise.
The Fed kept its target rate for overnight lending between banks in a
range of 0.25 percent to 0.50 percent, where it has been since it hiked
rates in December for the first time in nearly a decade.
The central bank has appeared increasingly divided over the urgency of
raising rates. On Wednesday, Kansas City Fed President Esther George,
Cleveland Fed President Loretta Mester and Boston Fed President Eric
Rosengren dissented on the policy statement, saying they favored raising
rates this week.
At the same time, policymakers cut the number of rate increases they
expect this year to one from two previously, according to the median
projection of forecasts released with the statement. Three of the 17
policymakers said rates should remain steady for the rest of the year.
The Fed also projected a less aggressive rise in interest rates next
year and in 2018, and cut its longer-run interest rate forecast to 2.9
percent from 3.0 percent.
Investors did not appear to significantly shift their bets on the timing
of the next rate hike. Prices for fed funds futures contracts suggested
investors continued to see just better-than-even odds of a hike at the
December policy meeting, and almost no chance of an increase in
U.S. stock prices rose after the Fed released its statement.
The dissents from those wanting a hike this week suggested to some
economists that pressure was building.
"While the Federal Reserve held rates unchanged, the highly unusual 7-3
vote points to the depth of its policy dilemma and makes a December hike
more likely," said Mohamed El-Erian, chief economic adviser at Allianz.
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United States Federal Reserve Chair Janet Yellen holds a news
conference following the two-day Federal Open Market Committee
meeting in Washington, U.S., September 21, 2016. REUTERS/Gary
FOCUS ON DECEMBER
Last December, the Fed signaled that four rate increases were likely
in 2016, but that was scaled back in March due to a global growth
slowdown, financial market volatility and concerns about tepid U.S.
The central bank appeared more confident on Wednesday, saying in its
statement that near-term risks for the economic outlook "appear
roughly balanced." That means policymakers think the economy is
about as likely to outperform forecasts as to underperform them.
The economy expanded sluggishly in the second quarter and added
fewer jobs than expected in August. Inflation also showed signs of
stirring last month.
The Fed's decision, which came the same day that Japan's central
bank added a long-term interest rate target to its massive
asset-buying program in an overhaul of its policy framework, was
widely anticipated by economists.
A Reuters poll showed the median probability of a September rate
rise was about 25 percent. Only 6 percent of those surveyed expected
the Fed to raise rates, with the majority believing it would wait
The Fed has policy meetings scheduled in early November and
mid-December. Economists believe policymakers would avoid a rate
hike in November in part because the meeting falls just days before
the U.S. presidential election.
(Reporting by Jason Lange, Lindsay Dunsmuir and Howard; Schneider;
Editing by David Chance and Paul Simao)
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