Fed expected to hold interest rate at zero

GMT 06:42 2015 Tuesday ,27 October

Arab Today, arab today Fed expected to hold interest rate at zero

US Federal Reserve
Washington - AFP

The Federal Reserve is expected to again delay raising interest rates when it begins a two-day policy meeting on Tuesday amid more signs of lethargy in the world economy.

With central banks in China and Europe headed in the direction of more easing and deflationary pressures all around, many economists and the debt markets are now betting that the first rate increase in more than nine years will not happen until next year.

That will buy some more time for emerging market countries and their businesses to prepare better for a long-expected and challenging tightening of US monetary policy.

But the turbulence in capital and currency markets that has accompanied the Fed's slow shift toward the increase will then likely continue, equally vexatiously.

After the last Fed meeting in mid-September, Chair Janet Yellen said that the policymakers of the Federal Open Market Committee were looking for a bit more confirmation of US economic strength amid the global slowdown.

She also forecast a federal funds rate rise from the current floor of 0-0.25 percent before the end of the year.

But since then, US exports and inflation have looked weaker, more doubts have arisen over China's ability to beat back a sharp downturn and the powerful US job creation machine of the past two years has ratcheted back into first gear.

Underscoring the impact of this shift, in an uncommon public split, two members of the five-person Fed board of governors publicly declared themselves in favor of waiting since Yellen last spoke in September.

"The chances of a rate hike announcement at October's FOMC meeting are slim to none," said Kim Fraser of BBVA bank.

Fraser says the meeting takes place as third quarter growth appears likely to be much lower than the hot 3.9 percent pace of the second quarter.

"Throughout the past few months, the US economy has been hit hard by weakness abroad, with many export-oriented industries reporting a significant drop in production," she said.

Analysts said they expect the FOMC to "mark down" its assessment of the economy in its policy statement, after displaying consistent confidence since the beginning of the year.

It is not where Yellen, now in her second year at the head of the Fed, expected to be.

A year ago, FOMC members were confident enough in US growth that, on average, they were predicting the Fed funds rate would be at 1.25 percent by the end of 2015.

With the rate having sat at zero since 2008 to shore up growth, the FOMC is anxious to move away from the extreme easy-money stance, which is fueling unneeded asset speculation and which has limits to its utility.

The Fed wants, however, the jobs market to tighten -- with clear signs, yet unseen, of rising wages -- and for inflation to pick up toward 2.0 percent, when it has generally weakened.

After the people's Bank of China last week lowered its rate and the European Central Bank hinted at the possibility of more easing in December, the Fed is further boxed in: a rate increase now would strengthen the dollar more, hurting US export industries and likely overall industrial output.

"The FOMC cited the strong dollar as a drag on net exports in the minutes to their September meeting, and also pointed out that the strong dollar holds down US inflation," said economist William Adams at PNC Bank.

According to CME Group data, two thirds of futures contract traders do not expect any movement in the rate before next year, with a majority expecting it only in March.

Some like the economists at Macroeconomic Advisors, predict a hike in December. But subsequent increases will come "at a slower pace than previously thought," given global weakness, they said.

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