US federal reserve keeps key interest rate unchanged for lack of ‘strength’ in economy

  • AFP, Washington
  • Updated: Sep 22, 2016 07:16 IST
US Federal Reserve chair Janet Yellen has said that weak inflation was still the anchor holding US monetary policy down. (Reuters file)

The Federal Reserve kept its benchmark interest rate unchanged for the sixth straight meeting on Wednesday, saying it needs to see a bit more sign of strength in the US economy.

While hailing a pickup in activity since the sluggish first half of the year, the US central bank showed uncertainty about some persistent weak signs in the economy, and cut its 2016 growth forecast to 1.8%, down from 2.0% in June.

Yet the policymakers on the Federal Open Market Committee displayed confidence the rebound would continue through the second half, and indicated that they foresee one quarter-point rate hike before the end of the year, and possibly two in 2017.

For the time being, though, they said they still needed more evidence that the economy was headed to full employment, as the jobless rate sits at 4.9%, and that inflation would pick up and move toward their 2.0% target.

“We judge that the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward our objectives,” said Fed Chair Janet Yellen.

That left the benchmark federal funds rate at an ultra-low 0.25-0.50%, still above the negative rates of the European and Japanese central banks but well below what the Fed itself had envisioned at the beginning of 2016.

The two-day FOMC meeting nevertheless showed the strongest division over policy since December 2014, with three of the 10 voting members arguing for a rate rise now.

Read: US Fed unlikely to raise rates, say experts. Indian markets trade higher

“The Fed left rates on hold but open warfare has now broken out,” quipped Ian Shepherdson of Pantheon Macroeconomics.

But he called the Fed statement in its whole “unambiguously more hawkish than in July,” predicting a hike in December.

The Fed meeting book-ended a day which began with the Bank of Japan embarking on an innovative new stance of targeted long-term bond yields to fight disinflation and get its economy moving.

Yellen made clear that weak inflation was still the anchor holding US monetary policy down, but that the issue was of a different degree to Japan’s.

“We are a long way from facing the problems that Japan faces,” she told reporters after the meeting.

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