Fed leaves rates unchanged. Cautions on declining business investment

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The Federal Reserve held its monetary policy meeting last week on Thursday. The first meeting after the U.S. mid-term elections and the stock market rout in October. The central bank maintained the interest rates unchanged at 2.0% – 2.25% at last week’s meeting.

Policymakers voted unanimously to keep interest rates unchanged as widely expected and were looking to the December Fed meeting for the fourth rate hike of the year.

The central bank made a few tweaks to its monetary policy statement on the economic conditions. The central bank was upbeat on the labor market as it said that the unemployment rate has been falling since the September monetary policy meeting. Data from the Labor Department showed a week ago that that U.S. unemployment rate was at 3.7% marking the lowest unemployment rate since 1969.

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However, the central bank was a bit cautious as it said that the business fixed investment growth had moderated from a rapid pace since earlier this year.

The Fed did not give more details as to why the business investment was declining. However, firms noted that in the third quarter, business investment plans were subdued due to the uncertainty of the U.S. and China trade war disputes.

Similar views were echoed earlier in the week by the European Commission which had cut its growth forecasts due to risks from the trade wars.

Except for the business investment, the U.S. economy was seen moving at a steady pace, according to the Fed’s statement. The statement noted that economic activity was rising sharply. The U.S. GDP was averaging about 3.3% during the three quarters of the year and is expected to close the year with a 3% average GDP growth rate.

The Fed, however, did not make any mention of the softness in the housing sector and neither did the statement make any mention of the recent stock market volatility. This suggested that policymakers were overlooking the temporary events. The markets have been volatile especially in October after investors got spooked that the Fed would have to hike interest rates at a faster than expected pace.

At the September Fed meeting, the central bank had removed the word “accommodative” from its monetary policy statement. Officials said that it was no longer necessary to describe its monetary policy as being accommodative.

The Fed is looking to shift its monetary policy to neutral interest rates. The last rate hike was in September, and it marked eight quarter-point hikes since December 2015. U.S. Fed funds rates are currently at a 10-year high.

Investors will now be focusing on the next Fed meeting in December. At the time of writing, the markets have assigned a 93 percent probability for the December rate hike.

However, looking forward, there seem to be some differences. The Fed officials have signaled three rate hikes for the year ahead. This is in contrast to the market expectations which forecast only two rate hikes next year.

The Fed’s meeting came just a day after the U.S. mid-term elections where the Democrats managed to clinch a majority in the House of Representatives. However, the Republicans maintained a majority in the Senate leading to a split congress.

This split congress is expected to see President Trump’s policies being checked. Most importantly, fiscal stimulus plans such as tax cuts are supposed to be met with resistance by the Democrats. However, the trade wars are expected to continue which could add to further uncertainty in the global markets.

The prospects of opening multiple investigations against the incumbent president also rank high which would not bode well for the U.S. equity markets.

The next Fed meeting is due December by when additional economic data such as the November payrolls and inflation data will be out to be assessed by the Fed officials.

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