US Fed keeps markets guessing

Analysts see Fed Reserve inching closer to interest rate hike

Hyderabad: The US Federal Reserve is keeping the markets guessing. Though the rate-setting committee has not raised rates, as expected by the markets, it, nevertheless, dropped some hints that the rate hike is not far away. It is expected to hike the interest rates in more than nine years.

The Fed policy statement, approved by a 10-0 vote, said, "On balance, a range of labour market indicators suggest that under utilisation of labour resources has diminished since early this year."

What it indicates is that the central bank is satisfied with the conditions of labour markets since its last policy meet in June, and feels that the slackness in labour market has diminished to some extent. However, the members would like to see a little more improvement in the labour market to take a view on the rate hike decision.

However, there is no clear signal on the Fed plans; it wants the low inflation should rise up to 2 per cent in the medium term. One can thus safely assume that the Fed may hike rates in its next meeting scheduled in September.

The statement is categorical about its opinion on rate hike that, "The Committee anticipates that it will be appropriate to raise the target range for the federal funds (rate hike) when it has seen some further improvement in the labour market...that inflation will move back to its 2 per cent objective over the medium term."

Thus, the twin goals of the Fed's approach would be maximum employment and inflation of 2 per cent. It concluded, saying that even after employment and inflation maintain levels as mandated, "...economic conditions may warrant keeping the target federal funds rate below levels, the Committee views (it) as normal in the longer run." It leaves it to market guess, and there are arguments for and against the rate hike both in September and December.

More than job creation, the falling inflation is a major hindrance for the Fed to take a hike decision. Since June comment, oil prices fell about 20 per cent, pushing inflation so low making it difficult to Fed to raise rates. On the employment front, since June the unemployment rate fell from 5.5 per cent to 5.3 per cent.

In a Reuters poll published last week, most of the economists forecast that the US economic growth would pick up after the first-half and the Fed will begin tightening monetary policy in September. According to Wells Fargo Chief Portfolio Strategist Brian Jacobsen, "The Fed is taking baby steps towards a rate hike.

Enough improvements have been made in the labour market that the Fed only needs a little more confirming evidence to say it is time." Interestingly, the US economic growth is expected to pick up in the second quarter, the government is to release its numbers in a day. However, according to a Reuters survey, the annual rate of GDP is put at 2.6 per cent, a decent bounce back. This may even trigger a rate hike in the near term, analysts opine.

By KVVV Charya