WASHINGTON – The latest on the Federal Reserve’s decision to keep interest rates at historic near-zero lows (all times local):
The Federal Reserve might soon have another reason to put off an interest-rate hike: political turmoil in Washington.
The government will partially shut down Oct. 1 unless Congress coughs up the money to keep it going. Some Republicans are refusing to fund federal agencies if any taxpayer money goes to Planned Parenthood. Another fight could erupt a few weeks later when Congress votes to raise the federal debt ceiling.
A budget standoff that leaves hundreds of thousands of federal employees temporarily unemployed could damage the economy.
In September 2013, a similar budget battle helped the Fed decide against scaling back a bond-buying program meant to help the economy. The government shut down for 16 days the following month. Once the showdown was over, the Fed in December began cutting the purchases.
Capital Economics expects a Fed rate hike later this year, but notes “it is not implausible that some other ‘risk’ will emerge over the next few months (the debt ceiling is the most obvious candidate) that will convince the Fed to delay even longer.”
One Federal Reserve policymaker believes zero interest rates aren’t low enough and is calling for rates to go negative.
The official wasn’t identified in materials the central bank released Thursday. But the likeliest suspect is Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis.
“He has been outspoken about his concern that inflation is too low and could move lower,” said Diane Swonk, chief economist at Mesirow Financial. “Kocherlakota will be leaving his post at the end of the year … it is easier to be provocative when you are walking out the door.”
The Fed has kept the rate it controls near zero since December 2008 and passed up a chance to raise it on Thursday. Still, many economists expect a rate hike later this year.
Kocherlakota was an inflation hawk before undergoing a stunning turnaround in 2012 that transformed him into one of the Fed’s strongest advocates for easy money policies.
On Wednesday night, during five hours of debate between Republican presidential contenders, none of the 15 hopefuls mentioned China’s economy, world financial markets nor the Federal Reserve’s interest rate policies.
Instead, the candidates focused on introducing themselves, managing front-runner Donald Trump and a slate of other issues, such as the environment, foreign policy and big budget decisions facing Congress this month.
China was mentioned only in the context of diplomacy. Wisconsin Gov. Scott Walker said President Barack Obama should cancel a visit with Chinese President Xi Jinping. Florida Sen. Marco Rubio said he would visit China as president.
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Federal Reserve Chair Janet Yellen says that the ultra-low interest rates have not widened the wealth gap.
Some economists say that the Fed has bolstered stock market returns, helping chief executives, hedge fund managers and trust-funders. But Yellen countered during her news conference that the low rates have provided a kick-start for hiring, noting that it’s hard to reduce income inequality if people are unemployed.
“The main thing an accommodative monetary policy does is put people back to work,” she said.
American manufacturers welcome the respite from higher rates.
A Federal Reserve rate hike likely would have pushed the U.S. dollar higher on foreign exchange markets. A strong dollar makes U.S. products more expensive overseas. A dollar is already up more than 15 per cent against major currencies over the past year.
And U.S. factories are hurting.
The Institute for Supply Management reported earlier this month that U.S. manufacturing grew last month at the slowest pace since May 2013. The Federal Reserve Bank of New York reported this week that factory activity in New York state fell in September for the second straight month. Factories cut 17,000 jobs last month, biggest drop in manufacturing employment in more than two years.
“It’s clear more time is needed to evaluate incoming data” before the Fed raises rates, says Chad Moutray, chief economist at the National Association of Manufacturers.
Federal Reserve Chair Janet Yellen says a rate hike is still likely this year. The majority of Fed officials on the committee setting the federal funds rate — which controls the interest banks charge each other — still see higher rates coming before 2016.
“Every meeting is a live meeting,” Yellen said at a news conference after the two-day meeting. “October, it remains a possibility.”
Fed officials will also meet again in December before year-end.
Reaction to the Federal Reserve’s decision to hold off on raising interest rates was muted on the stock market, but bond prices rose as investors expected inflation to remain tame.
The Dow Jones industrial average was up 38 points, or 0.2 per cent, to 16,775 at 2:30 p.m. Eastern time
That’s about where it was a half-hour earlier, when the Fed made its announcement.
The Standard & Poor’s 500 was up seven points, or 0.4 per cent, to 2,002 and the Nasdaq composite increased 27 points, or 0.6 per cent, to 4,917.
Bond prices rose. The yield on the 10-year Treasury note fell to 2.22 per cent from 2.30 per cent late Wednesday.
The yield on the two-year Treasury note fell to 0.72 per cent from 0.81 per cent the day before.
China has clearly crept into the Federal Reserve’s thinking.
Fed officials stressed that they are “monitoring developments abroad” and that the global slowdown might restrain U.S. economic growth and inflation levels.
This was a not-so-subtle gesture toward China, the world’s second-largest economy.
China’s economy has slowed for four straight years — from 10.6 per cent in 2010 to 7.4 per cent last year. The International Monetary Fund expects the Chinese economy to grow just 6.8 per cent this year, slowest since 1990.
A 1 percentage point decrease in China’s economic growth would reduce U.S. growth by 0.2 percentage points, according to estimates by Mark Zandi, chief economist at Moody’s Analytics.
Federal Reserve officials’ projections for the U.S. economy help to explain why the central bank delayed a rate hike.
Fed officials revised down inflation. The median estimate for inflation is now a modest 0.4 per cent this year, down from 0.7 per cent in the June projections. The Fed targets inflation at 2 per cent, a level the projections say won’t be achieved until 2018.
This indicates that they’re still waiting for signs that inflation — which has largely faded because of cheaper oil prices and a stronger dollar — will pick up.
Fed officials see growth as slightly stronger this year than they did in June. They also anticipate the unemployment rate falling from its current 5.1 per cent to a median of 4.8 per cent next year.
The Federal Reserve is keeping interest rates at historic lows for at least another month.
Pressure had been building as to when the U.S. central bank would hike rates from near-zero after Fed Chair Janet Yellen said in congressional testimony that it would likely be later this year. But Fed officials held off Thursday after a two-day meeting because inflation is running well below their 2 per cent objective and “recent global economic and financial developments may restrain economic activity somewhat.”
It’s extremely rare for Fed officials in their statement to highlight the risks posed by foreign economies. This means that they’re carefully monitoring the aftershocks from a slowdown in China and other emerging markets, in addition to struggles by Europe to increase economic growth.
Fed officials meet again in October and December.
Strange as it sounds, the social justice movement is united with Wall Street in opposition to a Federal Reserve rate hike. Protesters clad in green t-shirts rallied outside Fed offices. They hoisted signs that linked monetary policy with the racial disparities behind the “Black Lives Matter” movement.
“Black America is still in a Great Recession,” read one sign.
“Don’t raise the interest rate,” the group collectively chanted, arguing that the Fed will eventually encourage faster wage growth by holding rates at the near-zero level they have been at since late 2008. The group is questioning the presence of inflation in the economy — since rising prices have historically triggered rate hikes.