Posted on July 27, 2016

Fed Postpones Rate Hike Again

To the surprise of no one, the Fed once again refrained from raising interest rates even though the U.S. economy has posted surprising strength in recent weeks. Following a very weak jobs report in May, the June figures showed a considerable bounce back. Retail sales and housing activity have also surprised on the high side. But with the Brexit looming and core inflation yet to record a sustained rise, the Fed is remaining cautiously on the sidelines for the fifth meeting in a row.

Following seven years of easing monetary policy, the Federal Reserve hiked the overnight target federal funds rate in December of last year. At that time,  the Federal Open Market Committee (FOMC) forecast four rate hikes this year. Now, most Committee members believe there will be only one or two such hikes  and time is certainly beginning to run out. Chairman Janet Yellen will be speaking August 26th at the Kansas City Fed’s annual Jackson Hole soiree and we await those comments to get a better sense of the Fed’s game plan.

In the meantime, the Bank of Japan and the Bank of England are poised to cut rates once again as Brexit and the continued weakness in Japan loom large. The European Central Bank might well follow suit and the Bank of Canada, for now, will remain on hold in the hopes that fiscal stimulus will boost economic growth. Canada’s central bank has already seen interest rates fall to historic lows and further cuts would only spur what they believe to be excessive household borrowing. If anything, government authorities in Canada are wringing their hands about the continued housing booms in Vancouver and Toronto, which certainly need no additional interest-rate fuel.

In today’s Fed statement, the FOMC acknowledged that the labor market showed a considerable pick up in June following May’s weakness and that consumer spending remains strong. Business fixed investment, however, has been weak and inflation continues to run below the Committee’s 2-percent longer-run objective, partly reflecting the decline in energy prices and non-energy import prices. The Fed did suggest that “near-term risks to the economic outlook have diminished.”

This time, the decision to stand pat was not unanimous. As was the case after the April meeting, Esther George, President of the Kansas Fed held a dissenting view, preferring to raise the target range for the federal funds rate from 0 to 1/2 percent by a quarter point.