Bloomberg, Oct 28, 2015
Federal Reserve policy makers said the economy is still expanding at a “moderate” pace and they will consider tightening policy at their next meeting in December without making a commitment to act this year.
Even with a slower pace of recent job gains, “labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington.
The Fed also removed a line from September’s statement saying that global economic and financial developments “may restrain economic activity somewhat,” saying Wednesday only that the central bank is monitoring the international situation.
Chair Janet Yellen and her colleagues have been watching for more labor-market improvement and signs that inflation is rising toward their goal, despite headwinds from overseas, as they debate the first rate increase since 2006. At last month’s meeting, 13 of 17 officials still expected a hike this year provided the economy grew as forecast.
The assessment of the labor market, which said the pace of job gains “slowed and the unemployment rate held steady,” compared with last month’s language citing “solid job gains and declining unemployment.” The U.S. added 142,000 jobs in September, less than the 200,000 economists in a Bloomberg survey had forecast and well below the 205,000 average for the first eight months of 2015.
The FOMC vote was 9-1, as Richmond Fed President Jeffrey Lacker dissented for a second straight meeting, again calling for a quarter percentage-point rate increase.
Household spending and business fixed investment have been “increasing at solid rates in recent months,” the Fed said, compared with September’s language that those indicators have “been increasing moderately.”
The Fed reiterated that it expects inflation to rise gradually toward its 2 percent goal in the medium term.
Officials have held the benchmark overnight federal funds rate target in a zero-to-0.25 percent range since December 2008.
Investors before Wednesday’s statement saw a 4 percent chance that the Fed would move this month, based on pricing in fed funds futures that assumes a 0.375 effective rate after liftoff. They saw a roughly 35 percent chance of a move in December, as of 11:20 a.m. in Washington.
Subdued inflation has been a hurdle for the central bank as it moves closer to a rate increase. Even as the jobless level has fallen to 5.1 percent, close to policy makers’ 4.9 percent estimate of full employment, inflation has remained well below the committee’s 2 percent goal. The Fed’s preferred gauge of prices rose by just 0.3 percent in the 12 months through August.
In contrast, continued labor-market improvement has been a bright spot for the Fed as it looks to fulfill its dual mandate of maximum employment and stable prices. That makes the September slowdown in job growth a potential source of concern. Even so, several officials have indicated that a slower pace of job gains is acceptable and even desirable as labor-market slack ebbs.
“Looking to the future, we’re going to need at most 100,000 new jobs each month,” San Francisco Fed President John Williams said on Sept. 28 in Los Angeles. “In the mindset of the recovery, that sounds like nothing; but in the context of a healthy economy, it’s what’s needed for stable growth.”
Several important readings on the economy will be released later this week, including the initial estimate of third-quarter growth on Thursday. Economists surveyed by Bloomberg News estimated expansion slowed to a 1.5 percent annualized pace, from 3.9 percent in the previous three months.
The global outlook has proved another stumbling point for policy makers as they assess if the U.S. economy is strong enough to handle a rate rise.
A slowdown in China has helped to push down commodity prices, which is contributing to low inflation, while still-subdued economic performance in trading partners including Japan and the euro area have driven up the value of the dollar and cut into U.S. exports. The greenback had risen 9.2 percent against the euro and 0.5 percent against the Japanese yen since the start of the year, as of Wednesday at 9:43 a.m. in Washington.
The People’s Bank of China lowered benchmark interest rates last week, its sixth cut in a year, and European Central Bank President Mario Draghi said on Oct. 22 that he will investigate all options for more stimulus in December. That could include extending quantitative easing beyond its current end-date of September 2016, boosting monthly asset purchases from 60 billion euros and cutting the deposit rate. Those moves could brighten the international outlook if they succeed in propping up growth.
Global risk flows both ways: The International Monetary Fund on Oct. 7 told officials to protect their financial systems from possible instability as the Fed prepares to raise interest rates, saying shocks or policy missteps risk derailing the global economy and triggering equity market sell-offs. The fund described the preconditions for a Fed rate rise as “nearly in place.”