Fed expected to keep rates unchanged, may
signal year-end hike
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[September 21, 2016]
By Lindsay Dunsmuir
WASHINGTON (Reuters) - The U.S. Federal
Reserve is expected to keep interest rates unchanged on Wednesday amid
tepid inflation and recent weak economic data, but could signal an
increased likelihood of a hike by the end of the year.
The U.S. central bank raised its benchmark overnight interest rate to a
range of 0.25 percent to 0.50 percent in December, the first hike in
nearly a decade, but has held rates steady this year.
Economists polled by Reuters see a slim chance of a rate increase at the
conclusion of the Fed's two-day policy meeting on Wednesday, with the
majority expecting one at the meeting in December.
"The last thing the Fed wants is to disrupt financial markets with a big
surprise," said Torsten Slok, chief international economist at Deutsche
Bank.
The Bank of Japan on Wednesday added a long-term interest rate target to
its massive asset-buying program in an overhaul of its policy framework
aimed at accelerating achievement of its 2 percent inflation target.
The BOJ said it would continue to buy long-term government bonds, but
abandoned its base money target and instead set a "yield curve control"
under which it will buy long-term government bonds to keep 10-year bond
yields at current levels around zero percent.
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The Fed's rate-setting committee will release its policy statement at 2
p.m. EDT (1800 GMT). Fed Chair Janet Yellen is scheduled to hold her
quarterly press conference half an hour later.
The 17 Fed policymakers will have to balance a strong labor market,
marked by an unemployment rate of 4.9 percent and job gains that are
outpacing population growth, with inflation that is still well below the
central bank's 2 percent target and weak August readings for
manufacturing and service industry activity.
They have appeared increasingly divided on the urgency for a rate
increase.
Fed governors Lael Brainard and Daniel Tarullo both recently reiterated
they want to see firm evidence of rising inflation before resuming
monetary tightening.
The Fed's preferred measure of inflation remains low at 1.6 percent and
has been below target for more than four years.
But recent comments from a number of moderate policymakers suggest a
degree of impatience is building.
Atlanta Fed President Dennis Lockhart said last week there should be a
"serious discussion" about a rate hike at this week's meeting, while San
Francisco Fed President John Williams, seen as a close Yellen ally, said
two weeks ago that he would prefer to raise rates "sooner rather than
later."
Boston Fed President Eric Rosengren, usually seen as a policy dove, also
noted earlier this month that the risks to the economy were "becoming
increasingly two-sided." That remark initially led markets to start
pricing in a September rate surprise, although those expectations have
since receded.
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![](../images/092116pics/news_p23.jpg)
A security guard walks in front of an image of the Federal Reserve
following the two-day Federal Open Market Committee (FOMC) policy
meeting in Washington, DC, U.S. on March 16, 2016. REUTERS/Kevin
Lamarque/File Photo
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With Yellen unlikely to tip the committee's hand forcefully either
way, a compromise could assuage concerns.
"That's precisely what the outcome of the meeting is likely to be:
No move at this meeting, but a relatively low bar for hiking in
December," Roberto Perli, a partner at Cornerstone Macro LLC, said
in a note to clients.
The Fed also holds a policy meeting in early November, but investors
have all but ruled out a rate move just days before the U.S.
election.
RATE HIKE PATH
Alongside the policy statement, Fed officials will also provide a
new set of forecasts for economic growth, unemployment, inflation
and the path of interest rates.
When these projections were last issued in June, the Fed still
projected two rate hikes in 2016. That will likely on Wednesday be
cut to one.
The policymakers are also likely to downgrade their estimates for
how many rate rises the economy will need in the coming years given
that output, productivity and inflation are growing slower than in
past decades.
All of which means intense scrutiny on Yellen's comments in the
press conference, coming on the heels of her assessment in late
August that the case for a rate hike had strengthened in recent
months.
"She's likely to convey that she sees the fundamentals consistent
with a move in the relatively near term," said Randy Kroszner, a
former Fed governor who is now an economics professor at the
University of Chicago Booth School of Business.
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(Reporting by Lindsay Dunsmuir; Editing by David Chance and Paul
Simao)
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