This is the fifth consecutive time that the Fed left the benchmark funds rate unchanged in a 0.25% to 0.50% range.
Analysts say the main reason behind the fed decision is that the US inflation at 0.9% is well below the central bank’s 2% goal. Low inflation points to slower economic growth in the world’s largest economy.
Fed chair Janet Yellen has long argued that price rises will pick up as the effect of cheap oil and a strong dollar dissipates.
For Yellen and her compatriots on the Federal Open Market Committee (FOMC), inflation in particular has long defied their predictions of achieving target. It has remained and still remains (at 1%), below the Fed’s 2% target.
In December, 2015 the Fed had lifted the fed-funds rate by a quarter-percentage-point after holding it near zero for seven years. At the time, officials projected a full percentage point of rate increases this year, an estimate that now looks nearly impossible.
Signals from the Fed after the Federal Open Market Committee (FOMC) meeting on July 27 indicate that the officials concerned appear to be growing more confident they can raise rates at least once this year now that markets have settled in the wake of the Brexit vote and US economic data have improved.
Clearly, the Fed opened the door to an interest rate increase later this year, possibly as early as September, after a policy meeting at which officials concluded the economy is on more solid footing and risks to the outlook have diminished.
Fed officials have been fretting for months about a range of risks – including slow US economic growth during the first quarter, a dismal report on hiring in May, Britain’s vote to leave the European Union in June, long-running uncertainty about the outlook in China and a sluggish growth in major emerging economies with the exception of India.
They have put off rate increases for months because of such worries, raising doubts on Wall Street about whether and when they will lift rates again after nudging them up in December.
“Near-term risks to the economic outlook have diminished,” the Fed said in a policy statement after the July 27 FOMC meeting and noted that there are now fewer reasons to be worried about the US economy.
That said, a Fed decision in the next meeting, possibly in September, will be contingent upon the global economic situation, inflation figures in the US and the country’s overall economic data.
Already, the US faces weak productivity growth. In the previous economic expansion, in the 2000s, productivity growth averaged 2.5% a year. Since the financial crisis, it has averaged just 0.9%.
Another cause is an ageing population, which, by reducing the capacity of the economy to produce, deters investment.
Clearly, Yellen and her colleagues have a difficult task at hand when they meet again in a few weeks’ time for benchmark Fed funds rate-setting, which will have implications on the global economy.
