Fed stays on hold but sets up December hike

A US rate increase looks likely in December, barring an election shock.

As had been widely expected, the US Federal Reserve (Fed) left interest rates unchanged at Wednesday’s meeting. However, the US central bank is paving the way for a rate rise in December.

In the accompanying statement they said “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.” They also noted that the inflation rate was on track to reach 2% and that near term risks were “balanced”. There were three members who dissented in favour of higher rates.

In its projections the Fed downgraded its growth forecasts and has cut potential growth. In line with these moves, the Fed’s view of the neutral rate has also come down from 3% in June to 2.875%.

Against a backdrop of firming activity and a steady rise in inflation we should be on track for a December rate rise of 25 basis points. However, this call could be derailed by the presidential election on 8 November, or even the Italian referendum later that same month.

Keith Wade – Chief Economist & Strategist – Schroders