Frozen for now, US interest rates may rise in December

Washington, Nov 2 (IANS) The Federal Open Market Committee of the US Federal Reserve on Wednesday kept its short term interest rate intact for now, but gave an indication that a hike was on the cards in December on the back of economic recovery.

After a two-day, much-watched meeting of the committee chaired by Fed Chief Janet Yellen, the Committee said in a statement that while inflation was expected to rise over the medium and the labor market strengthen further, the near-term risks to economic outlook appeared roughly balanced.

“Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent (0.25 to 0.50 per cent). The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” it said.

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

At the same time, it expected gradual adjustments in the stance of monetary policy to expand economic activity and strengthen labor market conditions further — the two main stated objectives of the Committee.

While Yellen, and seven members voted to keep interest rates intact, two members voted against the action and wanted the target range to be raised to 0.50 per cent to 0.75 per cent.

The committee is scheduled to meet next on December 13-14.

The anxiety over the two-day meeting that concluded on Wednesday had left Indian bourses nervous earlier in the day and was among the major contributors to a sharp fall in key equity indices, ahead of the Fed announcement.

The 30-share sensitive (Sensex) of the BSE, which closed at 27,527.22 points, lost 349.39 points, or 1.25 per cent, while the 51-scrip Nifty of the National Stock Exchange (NSE) closed at 8,514.00 points, with a loss of 112.25 points, or 1.30 per cent.

A hike in the US interest rates can potentially lead foreign portfolio investors and funds away from emerging markets such as India. It is also expected to dent the business margins of corporates as access to capital from the US will become expensive.