US Federal Reserve officials lowered their expectations for rate hikes in the years ahead Wednesday but teed up a likely move before the end of 2016.
In a statement from the Federal Open Market Committee (FOMC) after this week’s meeting, the central bank expressed confidence in economic growth, but not enough to make a move this month.
“The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” the statement said.
US stocks held higher on Wednesday after the Federal Reserve kept interest rates unchanged.
The Dow Jones industrial average traded about 30 points higher after the announcement, with Boeing contributing the most gains. The S&P 500 gained 0.46 percent, with energy leading advancers and the Nasdaq composite traded about 0.2 percent higher. Stocks also hit session highs after the announcement.
The tipoff for what could be a December move came at what appeared to be a remarkably divisive FOMC meeting, judging by the statement and an accompanying summary of economic projections.
Three members from the hawkish Fed bloc – Esther George, Loretta Mester and Eric Rosengren – dissented from the statement, an unusual split considering Chair Janet Yellen’s adeptness at keeping the committee united. It was the most “no” votes since the December 2014 meeting.
Indeed, the so-called dot plot that shows individual members’ expectations indicated notably wider dispersion than the June meeting. While most Fed officials foresee a gradual increase of rates, one member expected the rate to be little changed from the 0.65 percent level all the way through 2019. Another member, meanwhile, put the rate expectation at 3.75 percent by 2019, more than a percentage point above the consensus.
Three members also indicated they do not want any hikes this year.
The increase likely would come at the December meeting, considering the November session comes just ahead of the presidential election and there is no post-meeting news conference scheduled.
The committee also reduced its expectations both for economic growth and inflation this year, though the statement said “the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year.”
“Although the unemployment rate is little changed in recent months, job gains have been solid, on average,” the committee added. “Household spending has been growing strongly but business fixed income has remained soft.”
The committee noted that inflation still has not risen to the Fed’s 2 percent target. The statement reflected a continued Fed belief that the target would be hit “as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.”
Fed officials had been concerned about global developments, particularly the Brexit vote and a slowdown in China. However, the statement made only passing mention of international developments.
Importantly, the balance-of-risks assessment that Fed watchers monitor closely made a return appearance in the statement, with central bankers judging those risks to be “roughly balanced.”
Overall, though, projections reflected a substantial pivot for a Fed that had anticipated a full percentage point hike in its interest rate target this year. Instead, officials now foresee a move to a 0.65 percent level this year, or a quarter point from the current 0.4 percent funds level (the official policy is to target the rate between 0.25 percent and 0.5 percent).
The Fed last hiked in December 2015, its only move higher in more than 10 years.
In the years ahead, the committee sees two hikes in 2017 and three each in 2018 and 2019 that would bring the funds rate to about 2.625 percent, assuming that each increase would come in quarter-point increments. Coincidentally, the Fed projections now have retreated almost exactly to market expectations in the CNBC Fed Survey.
As for growth, the committee now foresees full-year gross domestic product of just 1.8 percent, a decrease from the 2 percent estimate in June. The unemployment rate now is projected to be 4.8 percent, as compared to 4.7 percent in June, and headline inflation, which includes food and energy prices, is estimated at 1.3 percent, down from 1.4 percent in the last summary of economic projections that the Fed releases each quarter.