The Federal Open Market Committee (FOMC) concluded its two-day meeting today and as expected, voted to keep the federal funds rate unchanged with one dissenter voting against the decision. Richmond Fed President Jeffrey Lacker once again voted to raise rates by 0.25% but the FOMC’s statement suggests he may not be outvoted at the next meeting.
The committee sounded more upbeat than at the previous meeting, noting that the risks to the outlook for economic activity and the labor market are “nearly balanced”, with personal consumption and business fixed investment growing at “solid rates”. Net exports remain a drag though and the rate of jobs growth has slowed recently. However, the Fed expects the labor market to continue to improve further and for inflation to start moving towards the 2% target in the medium term as the effects of lower energy and import prices dissipate.
Following September’s decision to hold off a rate hike due to concerns about China’s economy and the turbulence in financial markets, there was little to suggest in today’s statement that the Fed continues to be worried about their impact. While the statement pointed that the committee will monitor global developments and take it into account in their assessment, there was no mention of immediate downside risks posed to the US economy.
What was a bigger surprise from the FOMC’s language was the specific reference to the December meeting. The statement went into detail to explain the different factors they will be considering when making the assessment to whether or not raise interest rates at their next meeting – something the Fed hasn’t done in its previous statements. With two more jobs reports and tomorrow’s third quarter GDP figures to go before December’s meeting, there is enough data that could convince the Fed to raise rates by then.
However, this should not be seen as a commitment by the FOMC that they will decide to start normalization in December as they would prefer to see more evidence that inflation is on course to move towards its target. Further negative developments in China and other emerging economies cannot be ruled out either, which could derail the Fed’s policy path like they did in September.
The dollar jumped over 0.6% against the yen after the statement, rising to 121.24 yen, having traded around 120.40 for much of the day. The euro broke out of its tight range to fall around 1.5% to a low of 1.0897 dollars before stabilizing around 1.0910 dollars. Sterling was less affected as the UK is not on a divergent monetary policy path like the Eurozone and Japan. The pound hit a low of 1.5248 dollars but later recovered to around 1.5260 dollars, which was still below its intra-day peak of 1.5347.