Fed Leaves Key Rate Unchanged With Economy Growing at ‘Strong Rate’

(Bloomberg) -- Federal Reserve officials left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid “strong” growth that backs bets for a hike in September.

Economic activity has been “rising at a strong rate,” and unemployment “has stayed low,” the Federal Open Market Committee said Wednesday in a statement released in Washington. “Household spending and business fixed investment have grown strongly.”

While leaving rates on hold as expected, the committee repeated guidance for “further gradual increases” in its policy benchmark, lining up September’s FOMC meeting for the third hike of the year.

President Donald Trump lashed out at the Fed last month, saying he wasn’t “thrilled” it was raising rates. The comments threw a political cloud over the central bank’s decisions, though economists and investors had widely anticipated Wednesday’s decision.

Policy makers “are not really affected or paying close attention to the political commentary,” said Laura Rosner, senior economist at Macropolicy Perspectives.

Stocks and bonds shrugged off the Fed announcement, with the Standard & Poor’s 500 Index closing down 0.1 percent and the 10-year Treasury yield at 3 percent at 4 p.m. New York time. Odds for a rate hike at the central bank’s Sept. 25-26 meeting held around 80 percent.

“The FOMC did nothing to the statement that would suggest a lower likelihood of a September hike,” said former Fed Governor Laurence Meyer, who runs a policy research firm in Washington. “The market has now priced a September rate hike as a near-certainty, and we agree with that assessment.”

Fed Chairman Jerome Powell is trying to nurture the second longest U.S. expansion on record by slowly reducing the amount of support that monetary policy provides to growth. The economy is riding a tailwind from tax cuts and higher federal spending, though a trade war threatens to dent growth.

The committee described risks to the outlook as “roughly balanced,” and restated that “monetary policy remains accommodative” while leaving the target range for its benchmark policy rate at 1.75 percent to 2 percent.

Most Fed officials in June projected three or four rate hikes for 2018, implying one or two more moves this year.

“There’s a lot of concern that the trade negotiations and the heightened rhetoric surrounding trade negotiations might lead to slower economic activity later in the year,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “While it certainly looks like it’s all systems are go for another rate hike in September, and another one in December, the text hasn’t been written just yet on that.”

Pricing in federal funds futures markets imply odds slightly above 60 percent for a fourth rate hike in December.

Policy makers weighed their action against a generally positive backdrop. The U.S. economy grew at a 4.1 percent pace in the second quarter, its fastest pace since 2014. Inflation is close to the Fed’s 2 percent goal, rising at 2.2 percent for the year ending June, while the core rate that excludes food and energy was up 1.9 percent.

The committee noted in the statement that both headline and core inflation “remain near 2 percent.”

Unemployment was 4 percent in June, below the Fed’s 4.5 percent estimate of the level that reflects full employment. The gradual pace of rate increases shows that officials want to see if tight labor markets can continue to draw more people into the workforce and produce higher wages, without sparking unwanted inflation.

Wednesday’s decision was unanimous 8-0. Voting members shifted chairs at this meeting, with John Williams voting for the first time as New York Fed president and FOMC vice chairman, with Kansas City Fed chief Esther George taking his place as an alternate for San Francisco while it seeks a new president.

--With assistance from Vince Golle and Reade Pickert.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net;Brendan Murray at brmurray@bloomberg.net

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