Rate hike not expected as Fed opens policy meeting

GMT 15:38 2015 Tuesday ,27 October

Arab Today, arab today Rate hike not expected as Fed opens policy meeting

Federal Reserve Chair Janet Yellen
Washington - AFP

With the US economy showing signs of slower growth, the Federal Reserve was expected to again put off raising interest rates as it opened a two-day policy meeting on Tuesday.

But Fed Chair Janet Yellen was tasked with bringing the members of the Federal Open Market Committee in line around a clear message, after a divide opened over the past month that has sowed confusion in markets.

Few analysts believed that the FOMC will raise the benchmark federal funds rate when the meeting ends on Wednesday, even though it has remained at an extraordinarily low near zero percent since the end of 2008.

After the September meeting, Yellen said she expected to begin what would be a slow series of increases by year-end, if the US economy continued to show strength.

But since then the key points of data, on output, hiring, wages and inflation, have all appeared weaker, in part because of the downturn in global economic activity.

And 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, with March the consensus view.

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.

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

"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.

The meeting takes place as third-quarter growth appears likely to be only around 1.6 percent, much lower than the hot 3.9 percent pace of the second quarter.

- Strong dollar a problem -

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 second gear.

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.

But, with markets on edge over any signal from the Fed, the onus is on the FOMC to clear up perceptions that its policy is drifting.

Weeks after Yellen said in September that she expected a rate rise this year, two members of the Fed board of governors publicly declared themselves in favor of waiting.

Both said the jobs market still showed too much slack, and inflation was too weak, to begin tightening monetary policy now.

Fed Governor Lael Brainard said in a speech that the downside risks to the economy "make a strong case for continuing to carefully nurture the US recovery -- and argue against prematurely taking away the support that has been so critical to its vitality."
While it appeared as a public split, their views also came after several data releases showed hiring and US output lower than expected, and China's growth outlook weakened.

The other problem is that the dollar has been stronger than US economists would like, and that has taken a toll on US exports, a key reason why economic growth slowed in the third quarter.

If the Fed does increase rates now, the dollar would likely strengthen.

"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.

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