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Fed meets, expected to again postpone rate rise

JUL 28, 201510:57 PM

[WASHINGTON] Federal Reserve policymakers are more confident about the US economy but are expected to again put off hiking interest rates at the end of a two-day meeting that begins Tuesday.

Members of the Federal Open Market Committee (FOMC) appear ever-closer to raising interest rates for the first time since 2006, analysts say, but want to see a bit more positive US economic data - including signs of a tighter labor market and of firmer inflation - to move.

Fed Chair Janet Yellen has said twice this month that she expects the benchmark federal funds rate to be increased by the end of the year.

And despite some calls to hold off until 2016, FOMC members appear anxious to break the ice with the first increase, even as they assure markets that increases after that are likely to come in slow steps.

The fed funds rate has been stuck extraordinarily at zero per cent since the end of 2008 to support the US economy's climb back from the Great Recession.

That revival has been slow, with a number of setbacks including a surprise stall in the economy in the first quarter of this year, and the easing of global growth on the back of the eurozone crisis and China's slowdown.

But key data has recently been closer to what the Fed said it wants to see to "normalize" monetary policy after years of easy money. The unemployment rate has fallen to 5.3 per cent, from 10 per cent at the 2009 peak, and inflation, as measured by core consumer prices, picked up to 1.8 per cent in June year-over-year, nearing the FOMC target of around 2 per cent.

Ms Yellen has been consistently cautious about those numbers, pointing to other signs of persistent weakness that suggests waiting on a rate liftoff.

In July comments she pointed out that the labor force participation rate is still extremely low at 62.6 per cent; the level of part-time employment is high at 6.5 million people, two million more than before the crisis; and wage growth has remained stubbornly slow.

"Too many people are not searching for a job but would likely do so if the labor market was stronger," Ms Yellen said.

"And, although there are tentative signs that wage growth has picked up, it continues to be relatively subdued, consistent with other indications of slack." But she also displayed, unlike before, greater optimism about the coming months. The economy "also might snap back more quickly" than generally expected, she allowed.

"Economic growth abroad could pick up more quickly than observers generally anticipate, providing additional support for US activity."

FOMC members still need more data to confirm that, which is why, analysts say, the panel will keep the fed funds rate unchanged in its official policy statement Wednesday.

But analysts will be looking for a change in the policy language that will hint at just how much longer the wait will be.

The statement "is likely to be neutral in keeping with the Fed's intention to be data-dependent," said Societe General currencies specialist Kit Juckes.

But he said that if the official estimate for second-quarter economic growth, to be released on Thursday, comes in as expected at a solid pace of around 3.3 per cent, "that should keep the Fed on track for a September rate hike." However, he added, the impact of sinking oil prices and turmoil in Chinese markets "will continue to muddy the waters" for US data.

AFP