The Federal Reserve today left rates unchanged, as expected, but it did suggest a rate hike before year-end.
“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,” read the Fed statement.
The statement noted that “the labor market has continued to strengthen…growth of economic activity has picked up from the modest pace seen in the first half of this year [and] near-term risks to the economic outlook appear roughly balanced.”
The latter statement about balanced risks “is about as close as you can get towards a commitment to a December hike,” said Quincy Krosby, market strategist at Prudential Financial.
Stocks rose on the news, adding to gains throughout the late afternoon—up around 0.8% in the Dow and S&P 500—and the 10-year Treasury yield fell slightly to 1.66%, from 1.70% before the Fed announcement.
Looking ahead, Daniela Mardarovici, managing director and senior portfolio manager of the five-star BMO TCH Core Plus Bond Fund, said, “The path will remain very shallow. The pace at which the Fed will increase interest rates and normalize policy will be very slow.”
The Fed has good reason to take its time, given its latest economic projections. It lowered its growth projections for 2016 and for the long run to 1.8% from 2%. It also reduced its projection for the personal consumption expenditures price index—its favorite inflation indicator—to 1.3% this year from 1.4% projected in June. And it set its 2017 inflation at 1.9%—still below its 2% target—which it projects won’t be reached until 2018.
In addition, decisions by the ECB and BOJ seem to give the Fed more flexibility on timing the next rate hike. The ECB recently decided against expanding its stimulative policy and the BOJ earlier today left rates unchanged but introduced a target rate for 10-year government bonds at zero, which is higher than the current rate.