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Washington - Federal Reserve policy makers took a step toward raising interest rates later this year but stopped short of signalling that the move could come as soon as September.
Federal Open Market Committee members upgraded their assessment of the economy in their monetary policy statement, released on Wednesday after their two-day meeting. They declared that near-term risks to the outlook have diminished and said labour utilisation has shown “some increase,” though inflation remains too low.
The dollar weakened against almost all of its major peers, losing 0.5% to the yen as bets on a rate hike remained below 50% after the Fed’s July review.
Acknowledging recent domestic economic strength alerts market participants to increasing policy maker optimism, yet it also leaves the Fed room to defer a hike should inflation fail to materialize, global risks intensify or US indicators slump.
"It’s kind of an upbeat statement, although guarded," said Roberto Perli, partner at Cornerstone Macro in Washington and former associate director for monetary affairs at the Fed Board. "This means, ‘We’re keeping an open mind about moving in September. We’re definitely not committed.’"
The US economy handed Fed officials good news ahead of their July meeting: Payrolls picked up in June after collapsing in May, fewer workers were part time for economic reasons, and although Britain voted to exit the European Union, the subsequent market fallout was orderly.
In light of those developments, some of the Fed’s wording changes stated facts. But some of their characterizations - like the view that “near-term risks to the economic outlook have diminished” and that job gains were “strong” - gave economists the sense that September is a live meeting for a move.
The committee meets next in September 20-21, then again the week before the November 8 presidential election and finally in December.
“The first paragraph is a clear acknowledgment that things are getting better,” said Priya Misra, head of global interest-rate strategy at TD Securities USA in New York. “They have taken a baby step toward the next hike.”
Backtracking
To be sure, the Fed has upgraded its assessment of the economy at other meetings this year - for instance, saying in April that “labour market conditions have improved further” - only to backtrack when faced with global financial-market turmoil and surprisingly weak data at home.
“Given the Fed’s risk aversion, I think the data need to be uniformly strong for them to move in September,” said Dean Maki, chief economist at Point72 Asset Management in Stamford, Connecticut. “What we’ve seen this year is that it’s real easy to knock them off course.”
Yellen will have a chance to clarify the Fed’s thinking when she speaks in Jackson Hole, Wyoming, on August 26.
“I am not sure if it is enough yet to get excited over September,” said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago. “The next thing we will get excited about would be Janet Yellen’s speech at Jackson Hole. If she wants to make a significant statement, that would be a great place.”
