No Rate Hike by US Fed, Rupee Surges against Dollar

The Federal Reserve is keeping its benchmark interest rate unchanged at a time of low inflation, which remains persistently below the Fed’s target level.

The Fed noted on Wednesday in a statement that inflation has stayed undesirably low even though the job market keeps strengthening, with the unemployment rate just 4.4%. Normally, solid job growth drives up wages and prices. But the Fed’s preferred gauge of inflation has moved further below its 2 percent target in recent months.

The central bank decided after ending its latest policy meeting to leave its key rate unchanged in a range of 1 percent to 1.25 percent after having raised rates twice this year in March and June.

The Fed says it still envisions further “gradual” rate hikes. But many economists say they foresee no further rate increases this year unless inflation picks up.

With the U.S. job market still solid after eight years of a grinding but durable recovery, the Fed has essentially met one of its two mandates — to maximise employment. But it’s so far failed to achieve its other goal of stabilising inflation at a favourable level.

Inflation has been edging further below the Fed’s 2% target in recent months. The problem is that too-low inflation can slow the economy by causing consumers to delay purchases if they think they can buy a product or service for a lower price later.

Over the past 12 months, the inflation gauge the Fed monitors most closely has risen just 1.4%, according to the latest data. That’s down from a 1.9% year-over-year increase in January. Many economists say they think the Fed will put off any further rate hikes until inflation resumes rising toward its 2% target.

The Fed’s statement Wednesday coincides with a period of lackluster growth for the U.S. economy. During the January-March quarter this year, the gross domestic product, the broadest gauge of economic health, grew at a comparatively lower rate of 1.4% annually — well below a healthy pace and far below the consistent 3% or more annual growth.

Fed watchers are also waiting for the central bank to announce when it will start gradually reducing its enormous $4.5 trillion in holdings of Treasury and mortgage bonds, which it accumulated after the financial crisis in a drive to ease long-term borrowing rates.

Some say they think the Fed will begin in either September or October to gradually shrink those holdings, a move that’s expected to put upward pressure on long-term borrowing rates, including mortgages.

Looking at the impact on Indian markets, the rupee surged by 21 paise to 64.16 against the US currency in early trade at the Interbank Foreign Exchange today as the dollar weakened globally after the US Federal Reserve kept policy rates unchanged.

Increased selling of the American currency by exporters and banks amid a higher opening in the domestic equity markets lifted the domestic currency, dealers said.