The Federal Reserve opted Wednesday not to raise interest rates, despite painting a rosier economic picture than it did just a month ago.
As expected, the Federal Open Market Committee kept its overnight interest rate target in the 0.25 percent to 0.5 percent range. However, it noted a labor market that has “strengthened” and said other indicators were pointing to growth.
“Job gains were strong in June following weak growth in May,” the FOMC said in its post-meeting statement, referring to nonfarm payrolls that rose from 11,000 to 287,000 over the one-month period. “On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.”
On the downside, the statement noted that inflation remains mired and is “expected to remain low in the near term” and then rise as the decline in energy prices turns and the labor market continues to strengthen.
“Near-term risks to the economic outlook have diminished,” the statement said, expressing a sentiment that had not been in the June missive. At last month’s meeting, the committee scaled back its economic projections and slashed its previous forecast of four rate hikes this year to two.
“They clearly have set the stage for a potential rate hike in September, but they didn’t want to commit themselves,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “You can tell they’re feeling a bit more confident.”
The statement said “household spending has been growing strongly,” an upgrade from language in June, but noted that business investment has been soft, a point underscored by data Wednesday that showed durable goods spending that disappointed again.
In June, the Fed lamented that the jobs market “slowed” and inflation indicators actually had declined. That statement reset market expectations for rate hikes.
“The statement has a bit better tone, reflecting significantly better data relative to expectations over the last six weeks,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “However, the Fed has gotten wise to the fragility of markets. They kept in that they’re still monitoring financial conditions, so even though many things broke positively for the Fed since their last meeting, they want to be extra cautious.”
Financial markets were assigning virtually no chance for a hike at this meeting, and the Fed has been sharply attuned to those expectations. However, a fairly hawkish central bank could increase those expectations for future months.
Heading into the conclusion of the two-day meeting, traders had been giving a September hike just a 20.9 percent chance, with a near-coin flip 49.5 percent probability of one before the end of the year. The Fed last hiked its overnight rate in December after keeping it anchored near zero for seven years. The funds rate most recently was at 0.4 percent.
Fed officials had been expressing angst over geopolitical developments, particularly June’s Brexit vote. Concern over global events, however, was absent from the statement.
The committee approved the decision with only one dissent, from Kansas City’s Esther George, who continued to push for a quarter-point hike.
The Fed’s decision to hold the line comes as concerns increase over global growth. Earlier in the day, Fitch Ratings said it had cut its forecast for Fed rate hikes from two to one this year and from three to two in 2017. The agency also said it expected central banks to be aggressive elsewhere in the world.