US Federal Reserve paves the way for pre-election rate rise
The Federal Reserve signalled the way to an interest rate rise before the US Presidential Election this evening as it heralded the strong pace of the economic recovery.
Rate-setters left policy unchanged on this occasion, as expected, but a hike for only the second time since the financial crisis is now a distinct possibility for September.
Statements for the meeting said the policymakers agreed “near-term risks to the economic outlook have diminished” and the labour market remains strong.
A disappointing jobs report and fears ahead of the UK’s referendum had spooked policymakers ahead of a meeting in June, while in the immediate aftermath of the Brexit vote, the prospect of a rate rise this year looked distance.
However, with financial markets holding up better than expected, the official minutes from the meeting of the Federal Open Market Committee (FOMC) said: “The labour market strengthened and economic activity has been expanding at a moderate rate.”
One policymaker, president of the Kansas City Fed Esther George voted for an immediate increase in rates for the third time in four meetings, though others held off, awaiting more data to be delivered over the summer. Tomorrow, official figures will reveal how fast the world’s largest economy grew in the second quarter of the year. At an annualised rate of just 1.1 per cent in the first three months, the US expanded slower than the UK, the Eurozone and Japan. The pace of growth is expected to have more than doubled.
The indication that rates could rise within the next few months would mark the latest divergence in monetary policy across the developed world. The Bank of England is expected to fire both monetary policy barrels when it meets next week. Market pricing suggests a 95 per cent chance of interest rates being cut while analysts believe a new round of quantitative easing is also likely.
The Bank of Japan, meeting this week, is also pitted to loosen policy, while the Eurozone may be forced to act after the summer to prop up the economy in the wake of the UK’s decision to leave the EU.