Fed Holds Rates Unchanged Ahead of Expected December Hike

(Bloomberg) -- The Federal Reserve left interest rates unchanged and stayed on course to hike in December despite recent jitters in financial markets and a critical president.

The U.S. central bank said “economic activity has been rising at a strong rate” and job gains “have been strong,” acknowledging a drop in the unemployment rate, while repeating its outlook for “further gradual” rate increases in its statement Thursday following a two-day meeting in Washington.

Risks to the outlook appear “roughly balanced,” the Federal Open Market Committee said, leaving that language unchanged from the prior meeting in late September. Inflation expectations, which have slipped slightly in recent weeks according to some measures, were described as “little changed, on balance,” the same as in the last statement.

“Absent anything new between now and the last meeting of the year, they’ll continue on with another 25-basis-point increase” in December, said James Kahn, an economics professor at Yeshiva University and a former vice president at the New York Fed. “The language is designed to try to not look too far ahead,” to give them flexibility, he said.

By keeping the door open to a fourth 2018 hike in December, officials are sticking to their gradual upward path, trying to prolong the second-longest U.S. expansion on record without making an error. Leaving monetary policy too loose risks stoking excess inflation and asset bubbles, while tightening too fast could cause a recession.

The unanimous 9-0 decision left the benchmark federal funds rate in a target range of 2 percent to 2.25 percent, following eight quarter-point hikes since late 2015. The interest rate the Fed pays banks on excess reserves -- a tool for keeping the effective funds rate within the Fed’s target range -- was left unchanged at 2.2 percent, as expected.

Stocks slipped and the dollar extended gains after the decision was announced, with the S&P 500 Index closing 0.3 percent lower at 2,806.83. Odds of a December rate hike were about 74 percent, according to pricing in interest-rate futures in late New York trading.

Investment ‘Moderated’

In one of the only other tweaks to the statement, the FOMC said growth in business fixed investment has “moderated from its rapid pace earlier in the year,” compared with the previous assessment that it has “grown strongly.” Third-quarter data showed non-residential investment increased at the slowest pace in almost two years.

Meanwhile, household spending “has continued to grow strongly,” the Fed said, echoing its previous assessment of consumption, which accounts for about 70 percent of the economy.

Chairman Jerome Powell and colleagues are feeling their way toward a more normal policy setting after years of extraordinary stimulus.

The tightening cycle may be crimping some segments of the economy. U.S. stocks suffered their steepest losses last month since 2011 in part because of concern the Fed could slow the economy too much. Sales of previously-owned homes were down 4.1 percent in September from a year earlier, and the cost of a 30- year fixed mortgage hit an eight-year high last week.

The task of getting policy right is also complicated by harsher political scrutiny. President Donald Trump criticized past rate shifts and blamed the Fed for the market meltdown in advance of this week’s midterm elections, which delivered control of the House of Representatives to Democrats.

Trade, Fiscal

A year since being nominated by Trump to helm the Fed, Powell is overseeing an economy in a sweet spot: It grew 3 percent over the past four quarters, and for the first time since the Fed introduced its 2 percent inflation objective in 2012, both the headline and core measures of year-on-year price changes hit the goal in September. 

Unemployment is at 3.7 percent, the lowest in 48 years, while rising wages and demand for labor are pulling more people into the workforce, helping offset retirements by baby boomers.

Fed officials will update their forecasts in December having previously penciled in three increases in 2019, which would put the main rate roughly at levels that policy makers see as neither boosting nor restraining the economy.

Thursday’s Fed decision will be the last one without a press conference by the chairman. Powell’s final regularly scheduled quarterly briefing will occur after December’s gathering, and in 2019 he will begin speaking to reporters after every FOMC meeting.

--With assistance from Chris Middleton and Christopher Condon.

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

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Scott Lanman, Alister Bull

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