Divided Fed to leave rates untouched as US vote looms

Despite some division in its ranks, the US Federal Reserve is expected to leave interest rates unchanged Wednesday as policymakers gathered in the shadow of the hotly contested presidential election.

Despite some recent signs of improving health in the world's largest economy, analysts say the Federal Open Market Committee, the Fed's monetary policy board, is not under pressure to move on rates so close to the start of voting.

Tim Duy, an economist at the University of Oregon and author of the Fed Watch blog, told AFP the Fed members have concluded they should raise rates before the end of the year, but they likely will wait until they are no longer sharing the stage with White House candidates Donald Trump and Hillary Clinton.

"There is really no pressing reason in the data to hike rates," Duy said.

Raising rates just before an election, which could invite needless political controversy, is rare for the Fed, which has done so only once since the 1980s.

However, researchers say there is little evidence the FOMC acts based on the US political calendar.

Instead, the Fed may use the occasion to put the public on notice to expect a rate increase in December. Fed Chair Janet Yellen in recent months has signaled that the case for raising rates has grown stronger. 

Yet even that is far from guaranteed. 

"Although we think the committee will hike in December, our analysis suggests that the fundamental macroeconomic argument for hiking rates is as weak as it was last December when they hiked rates for the first time in a decade," Steven Ricchiuto, chief economist at Mizuho Americas, said in a client note.

- Slow recovery -

The course of policy tightening has been far slower and more shallow than forecast by the Fed since last December, as the FOMC repeatedly put off raising rates citing weak global and domestic economic performance and uncertainty from political events.

Some US policymakers wanted to raise rates sooner to ward off possible inflation. But they have been out-voted by other FOMC members who did not want to interrupt what has been a disappointingly slow economic recovery.

Since the last policy meeting in September, the US economy has gained strength, growing at a 2.9 percent clip in the third quarter and adding a solid 156,000 jobs in September, with unemployment holding steady at 5 percent.

On an annual basis, inflation stood at 1.2 percent in September, its highest level in nearly two years but well below the Fed's 2 percent target range.

However, the economic and political calendars contain much which could derail a December rate hike, such as raucous US elections and their uncertain aftermath, two more monthly jobs reports, and struggling crude markets, as well as political developments in Europe.

Fed funds rate futures, which indicate investor expectations for monetary policy, Tuesday showed the likelihood the Fed will not raise rates this week at 93 percent. But the probability of a hike in December is 73 percent.

The elections also had Wall Street flummoxed, with all three major US indices finishing between 0.6 and 0.7 percent lower on the uncertainty generated by the bitter battle for the White House.

Source: AFP