Fed leaves rates unchanged, notes slowing in business investment

Jerome Powell

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The Federal Reserve opted not to change interest rates Thursday but hinted that rates are likely to rise in December. A rate hike is widely expected in December, and the Fed has indicated it is likely to do three more increases next year.

Despite a US trade war with key nations, weaker corporate investment and a sluggish housing market, the Fed is expressing confidence in the economy's resilience. Swonk is predicting four rate hikes next year - one more than the Fed is anticipating - because she believes inflation will be above the Fed's 2 percent target and the Fed will act swiftly to contain it.

Since December 2015, the central bank has approved eight quarter-point rate hikes, bringing the benchmark rate to around a 10-year high. Last week, the government said that employers added a robust 250,000 jobs in October and that average pay grew 3.1 percent over the previous 12 months - the best year-over-year gain in a decade. Powell will speak after the December meeting and after every meeting next year, a first for a Fed chair and a sign of Powell's commitment to making the bank as transparent as possible.

The Fed noted that business investment "has moderated from its rapid pace earlier in the year", a surprise since the tax cuts were expected to boost business spending.

The Federal Reserve's policymaking committee is meeting this week.

The Fed in September raised its benchmark federal funds rate for the third time this year, citing the strong labor market and healthy spending by consumers and businesses. Its brief statement was almost identical to the one the Fed issued in September.

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Since Fed officials met in late September, "the labor market continues to strengthen", the statement read.

"The question for the market is, is the Fed data-dependent or is it maintaining a rigid schedule for rate hikes in 2019?" said Quincy Krosby, chief market strategist for Prudential Financial in Newark, New Jersey.

Fed officials worry that such low unemployment and higher wages could speed up inflation, forcing the central bank to raise rates more aggressively, and tip the economy into recession. The central bank's policymakers have stressed, and most economists agree, that these small quarter-point increases amount to a gradual pace of credit tightening.

At the same time, the nervousness among stock investors reflects the reality that the Fed's steady march toward higher rates is removing a key factor that has underpinned the bull market in stocks: The richer returns that investors could achieve in stocks than in bonds or savings accounts.

Data released in late October showed the US economy grew at a 3.5 percent annual rate in the third quarter, well above the roughly 2 percent annual growth pace the Fed and many economists regard as the underlying trend.

Trump's public criticism has aroused concern that he is intruding on the political independence the Fed needs to assure markets that it will make tough choices when needed to keep inflation under control.

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