Fed holds key interest rate steady but signals a hike could come this fall

Federal Reserve policymakers said Wednesday they were holding a key interest rate steady but signaled a hike could come this fall as their concerns have eased about a slowing job market and the fallout from Britain’s vote to leave the European Union.

Following a two-day meeting, central bank officials voted to keep the federal funds rate at between 0.25% and 0.5%, where it has been since December.

But there was a markedly improved characterization of the U.S. economy in the statement released by the policymaking Federal Open Market Committee compared with what was said after the last meeting in June.

The labor market had “strengthened” since June, with “strong” job gains and household spending that “has been growing strongly,” the committee said Wednesday. Policymakers noted that “near-term risks to the economic outlook had diminished.”

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A key risk that had eased was the potential for the effects of the “Brexit” vote to cause long-term turmoil in financial markets and hinder U.S. economic growth.

While world financial markets tumbled sharply in the immediate aftermath of the British vote, they have rebounded since then. Major U.S. stock indexes hit record highs last week.

The Fed statement’s upbeat language opened the door for a small rate hike at the committee’s next meeting, in September.

“The tone of the statement reaffirms our view that the FOMC is likely to raise its policy rate at the September meeting, so long as the labor market continues to perform,” Barclays said in a research note after the statement was released.

But Lindsey M. Piegza, chief economist at brokerage firm Stifel Nicolaus & Co., said she thinks the Fed is unlikely to raise the rate any time soon, noting the statement did not say near-term risks to the economy had disappeared.

“After all, ‘diminished’ translates into still-present with strength in some sectors merely offsetting weakness in others,” she said.

The Dow Jones industrial average rose about 50 points after the statement was released but then fell about the same amount, closing down 1.58 points at 18,472.17. Stocks would be expected to decline in the face of a potential rate hike because it would make saving money more attractive.

The Fed has been expected to hold the rate steady Wednesday, with the odds of a hike at just 3.6%, according to a closely watched barometer from the CME Group futures exchange.

But the odds increased to 26% for September, according to futures activity before the statement was released. After the statement, the odds for September declined to 18%.

Based on futures prices tied to the federal funds rate, investors now believe there’s nearly a 40% chance the FOMC will wait until December to increase the rate.

Fed policymakers seemed poised for a small rate hike in June as economic growth picked up following a weak winter. But the May jobs report was shockingly poor -- just 38,000 net new positions were added, later revised down to 11,000.

Fed policymakers decided they wanted to see more data to determine if the one-month plummet in job growth was an anomaly or a signal of a slowdown in the labor market.

On top of those concerns, the Fed’s June meeting took place just days before the Brexit referendum. Fed Chairwoman Janet L. Yellen said she and her colleagues were worried about the potential economic effects of a British vote to leave the EU and didn’t want to contribute to financial market turmoil by enacting a rate hike.

The rate has been raised only once -- by a quarter percentage point in December -- since 2006, when the Fed began lowering it to try to stimulate growth as the economy slid toward the Great Recession.

For seven years beginning in late 2008, the Fed held the rate at an unprecedented level of near zero.

In their most recent quarterly forecast, in June, a majority of Fed policymakers said they anticipated making two quarter-point rate increases this year.

That forecast has led most analysts to predict a rate hike in September and then again in December because the only other FOMC meeting takes place a week before the presidential election.

The Fed, which is an independent agency, tries not to show partisanship. A rate hike just days before the Nov. 8 election could be seen as an attempt to signal to voters that the U.S. economy is gaining strength.

Wednesday’s statement was approved 9-1, with Esther George, president of the Federal Reserve Bank of Kansas City, dissenting. George wanted to raise the target range of the rate by a quarter percentage point, the statement said.

jim.puzzanghera@latimes.com

Follow @JimPuzzanghera on Twitter

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UPDATES:

1:05 p.m.: This article was updated with analyst and market reaction, as well as revised odds from the CME Group for a rate hike this fall.

This article originally was published at 11:15 a.m.