Feds hold off on rate hike before U.S. vote

The Federal Reserve left interest rates unchanged Wednesday, six days before Americans choose a new president, but hinted again that it would likely raise rates soon.

The Fed said that the case for rate hike has “continued to strengthen” but that it had decided to wait for further evidence of progress toward its objectives. Most analysts and investors expect a rate hike at the Fed’s next meeting in mid-December.

“There is little doubt that the Fed has clearly communicated its intentions of raising rates at its next meeting in December,” writes Michael Dolega, senior economist at TD Economics.

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The statement the Fed issued closely tracked its statement after its September meeting, noting that the job market has continued to strengthen and that economic activity has picked up. The Fed had been widely expected to leave rates alone Wednesday, in part to avoid any perception of affecting next week’s vote.

Analysts also noted that whether the Fed raised rates this week or not until mid-December would make little economic difference. With inflation still running below the Fed’s 2% target, some Fed officials have said they think they have room to continue pursuing an extremely gradual approach to rate increases.

From job growth to home purchases, the U.S. economy has been demonstrating its resilience seven-plus years after it began recovering from the Great Recession. The economy grew at a respectable 2.9% annual pace in the July-September quarter, the government estimated last week.

Read: Snapshot: U.S. economic data

The unemployment rate is 5%, typical of a healthy economy, down from 10 per cent in 2009. The housing market, whose meltdown triggered the 2008 financial crisis and the recession, has largely recovered.

A rate hike next month would mark a resumption of the increases the Fed began in December, after having left its benchmark rate at a record low near zero for seven years.

The Fed’s decision at its previous meeting in September not to raise rates drew an unusually high three dissents from members of its policy committee. The three dissenters wanted to act immediately to raise rates. This time around, two dissenters wanted to raise rates now.

“There was a slightly hawkish tilt to the announcement,” notes CIBC World Markets economist Royce Mendes. He speculates that Boston Fed head Eric Rosengren, who dropped his dissent this time around, may have been motivated by the election timing, and the lack of opportunity to explain a rate change after this meeting.

Read: BoC rate cut unlikely after August GDP bump

Next month’s Fed meeting will include a news conference by Chair Janet Yellen, which would provide a platform for her to explain any action the Fed takes then and perhaps provide guidance on how many further rate increases are probable in 2017.

The Fed’s years of record-low short-term rates were credited by many analysts with rejuvenating the economy after the Great Recession. When the Fed finally raised rates modestly in December last year, most economists and the central bank itself foresaw multiple rate increases in 2016. But economic weakness and market turmoil in China and Europe and a slowdown in U.S. growth kept the Fed on the sidelines.

“Even if the Fed did act to raise the fed funds target later this year, policymakers have made clear that the pace of rate hikes will be gradual,” write RBC deputy chief economist Dawn Desjardins in a note to analysts.

Fed watchers believe Yellen’s go-slow approach to rate increases may mean one move this year and then one, or at most two, increases in 2017.