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Federal Reserve begins two-day meeting to decide on interest rates

Federal Reserve begins two-day meeting to decide on interest rates

Global banks and investment funds see the chances for a rate increase as essentially a toss-up, although most experts see a slightly higher probability for no change in monetary policy.

In a Reuters poll of 80 economists, 45 said the Fed would keep its benchmark interest rate between zero and 0.25 per cent, while 35 expected a hike. (Photo: Reuters) In a Reuters poll of 80 economists, 45 said the Fed would keep its benchmark interest rate between zero and 0.25 per cent, while 35 expected a hike. (Photo: Reuters)

The Federal Reserve began a two-day policy meeting on Wednesday with economists evenly split on whether Thursday will see the first official US interest rate rise since 2006.

The decision by the US central bank's Federal Open Market Committee (FOMC) is expected on Thursday at 2 pm.

US economic data are flashing conflicting signals, with unemployment falling but inflation subdued, while slowing growth in China has led to a 40 per cent fall in Shanghai stocks in three months, leaving global markets on edge.

Global banks and investment funds see the chances for a rate increase as essentially a toss-up, although most experts see a slightly higher probability for no change in monetary policy.

In a Reuters poll of 80 economists, 45 said the Fed would keep its benchmark interest rate between zero and 0.25 per cent, while 35 expected a hike.

Among primary dealers, 12 banks expect it to hold steady and the remaining 10 expect a rate increase.

"You can make a strong case either way for the Fed to begin raising interest rates or waiting," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

"The prudent risk management approach would argue for them to hold off, but if the Fed was really data dependent there is a very strong case to raise rates on Thursday."

Based on trading in Chicago Mercantile Exchange fed futures contracts, though, financial markets on Wednesday saw only a 23 per cent chance of a rate rise at Thursday's FOMC meeting.

UNEMPLOYMENT FALLING, INFLATION SUBDUED

The Federal Reserve is mandated by Congress to consider both unemployment and inflation when formulating monetary policy.

The US unemployment rate fell to 5.1 per cent in August, a level the Fed sees as likely to boost both wages and inflation, but average hourly earnings have risen only 2.2 per cent in the past year.
 However, even with the federal funds rate target at 0.00-0.25 per cent since 2008, there has been little sign of US inflation while economic growth was running at a 3.7 per cent annual pace in the second quarter of this year.

In data reported on Wednesday by the US Labor Department, consumer prices unexpectedly fell in August as gasoline prices resumed their decline and a strong dollar curbed the cost of imports. The dollar .DXY has gained 17.1 per cent against the currencies of the United States' main trading partners since June 2014.

The Consumer Price Index slipped 0.1 per cent, the first drop since January, after edging up 0.1 per cent in July. In the 12 months through August, the CPI rose 0.2 per cent after a similar gain in July.

So-called core CPI, which strips out food and energy costs, ticked up 0.1 per cent last month after a similar rise in July.

In the 12 months through August, core CPI increased 1.8 per cent. It was the fifth time in six months that the 12-month change was 1.8 per cent.

The prospect of a rate rise has strengthened the dollar in the past year, while weakening emerging market currencies already hit by falling demand for commodities from China.

Stocks on major world markets tumbled in August as a result, with the JP Morgan world index falling 7.0 per cent and the US S&P 500 index off 6.0 per cent.

"Fed Chair Janet Yellen has been conspicuously silent, with no significant comments since July's congressional testimony," wrote Standard Chartered senior economist Thomas Costerg in a note explaining the decision to switch to predicting a December rate rise.

"We think the recent global market volatility - driven by ongoing concerns about global growth - has raised the bar for a first rate hike near term."

(Reuters)

Published on: Sep 17, 2015, 8:32 AM IST
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