US Fed holds rates as inflation remains below target

In a statement the central bank policymakers noted that inflation continued to run below the Committee’s 2 per cent target in spite of increased household spending, with most “survey-based measures of longer term inflation expectations” remaining low.

The Committee voted by a majority in favour of keeping interest rates unchanged, with just one member voting for an increase to 0.5 to 0.75 per cent. But the statement from the committee acknowledged that “near-term risks to the economic outlook have diminished”, suggesting a rate rise may still be on the cards for later in 2016.

David Kelly, chief market strategist at JP Morgan Asset Management, commented: “[The] FOMC statement supports our view that a rate increase in September is possible. However, we have seen the Fed quickly reverse its tone on the US economy in the face of financial market or economic deterioration in the past, so a rate increase at the next meeting would require a continued steady stream of positive economic data and calm markets.

“Additionally, if conditions remain positive we would expect Fed governors to sufficiently raise market expectations for a rate increase before the actual event.”

But David Buckle, head of quantitative research at Fidelity, added: “It’s going to take another leg up in core inflation before the Fed responds and we don’t see that happening in 2016. The only glimmer of hope is to observe that wage growth corrected its recent reduction in July and returned to near the highs since the financial crisis; but not high enough yet to cause the Fed to believe we’ve reached full employment.

“There are only three meetings left this year – September, November, December. While not out of the question, it’s hard to see a rise on September 21. There are still a lot of risks in the global economy, plus the upcoming US presidential election.”