Unusual suspense for Fed meeting amid “considerable uncertainty”


The Federal Reserve has been hinting since last year at higher interest rates, but even recent meetings held little suspense. Wall Street’s clear expectation was for monetary policy to be tightened in September or October, until last month’s Chinese stock panic and the stronger dollar wrought havoc on financial markets.

The rate-setting US Federal Reserve’s benchmark interest rate – at an unprecedented near-zero since December 2008 – could change as early as Thursday. Or later this year. Or 2016.

Minutes from the Fed’s last meeting in July indicated that US central bankers were awaiting further improvement in the economy before hiking rates from the current all-time lows.

The Federal Open Market Committee, led by Fed Chairwoman Janet Yellen, left the unprecedented near-zero range on its benchmark interest rate unchanged at that July 29 meeting.

Notes from the meeting said that one member of the monetary policy-making committee “indicated a readiness to take that step” of a rate hike, “but was willing to wait for additional data to confirm a judgement to raise the target range.”

Overall, the panel “concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met.”

For most of the summer, a strong consensus of Wall Street economists expected the Fed to take action either at this week’s meeting, which ends Thursday, or at the next meeting on October 28.

Those forecasts were thrown into chaos by the August swoon on global equity markets, which struck in the wake of China’s stock market correction. Fear sent investors to the safe-haven of the dollar, pushing the already strong US currency even higher while tightening private lending conditions.

The effect on the US economy was potentially similar to what the Fed would be trying to achieve with an interest rate hike. But the chill could be fleeting, as spooked investors regain their nerve.

Federal Reserve Vice Chairman Stanley Fischer told financial broadcaster CNBC on August 28 that waiting for “overwhelming” evidence to act on monetary policy would be a mistake.

“If you wait that long, you will be waiting too long,” he said.

“There is always uncertainty and we just have to recognize it. We’ll have to make a decision in the face of considerable uncertainty.”

As always, the Fed is eyeing employment and inflation as it considers its first tightening of monetary policy since before the 2008 financial crisis.

Yellen and other fed policymakers have long said publicly that they expect to take action this year, assuming the economy continues to improve.

In last month’s monetary policy statement, the Fed said it expected to tighten monetary policy once it saw some further improvement in the labour market and was “reasonably confident” that inflation would move back to its 2-per-cent objective over the medium term.

Consumer inflation slowed in July to a seasonably adjusted 0.1 per cent, after faster price increases in May and June. Excluding volatile food and energy prices, so-called core inflation was 1.8 per cent for the 12 months through July.

The US economy regained momentum in the second quarter, expanding at an annual rate of 3.7 per cent in the April-June period after a first-quarter slowdown, according to the federal Bureau of Economic Analysis last month.

The US has been in economic recovery since July 2009, with the unemployment rate falling in August to a seven-year-low of 5.1 per cent, down from a post-crisis peak of 10 per cent in October 2009.