WASHINGTON (Reuters) – The U.S. Federal Reserve held interest rates steady on Thursday but remained on track to keep gradually tightening borrowing costs, as it pointed to a healthy economy that was marred only by a dip in the growth of business investment.
FILE PHOTO: The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/File Photo/File Photo
Business investment can be a key to rising productivity and future growth, and the fact that it had “moderated from its rapid pace,” as the Fed said, was the only cautionary note in a policy statement that touted strong job gains and household spending, and a “strong rate” of overall economic activity.
“The labor market has continued to strengthen and … economic activity has been rising at a strong rate,” the U.S. central bank said, leaving intact its plans to continue raising rates at a gradual pace. The Fed has hiked rates three times this year and is widely expected to do so again in December.
The statement overall reflected little change in the Fed’s outlook for the economy since its last policy meeting in September. Inflation remained near its 2 percent target, unemployment fell, and risks to the economic outlook were still felt to be “roughly balanced.”
Policymakers, however, took particular note of the moderation in business investment, an important component of GDP that can spin off jobs as companies build new facilities, and raise productivity as they upgrade equipment and processes.
Boosting investment was one of the main objectives behind the Trump administration’s move to reduce the corporate tax rate as part of its restructuring of the tax code at the end of 2017.
After adding four-tenths of a percentage point to economic growth in the first six months of the year, lagging investment in “nonresidential structures” trimmed a quarter of a percentage point in the annualized growth rate for the third quarter.
Financial markets, which had expected the Fed to hold its benchmark overnight lending rate steady in the current range of 2.00 percent to 2.25 percent this week, ticked lower after the statement was released.
After a stock market rout in October and signs that both housing and business investment may be waning, some analysts expected the Fed to possibly signal doubt about its next rate increase.
Yet December still seems firmly in play.
“The only surprise here is that they weren’t more hawkish,” said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York. “There were a couple words that were more muted – that business investment had ‘moderated’ from its earlier pace. But apart from that they have not signaled any warning signs at all.”
U.S. stocks, which had rallied broadly on Wednesday after the results of the U.S. congressional elections, turned lower as the Fed’s statement offered no indication the central bank might slow the pace of its rate increases.
The dollar also weakened against the euro and yen and U.S. Treasury yields held near the day’s high. The 10-year Treasury note yield, a benchmark for both consumer and business borrowing costs, was 3.23 percent, around the highest since 2011.
Data released in late October showed the U.S. economy grew at a 3.5 percent annual rate in the third quarter, well above the roughly 2 percent annual growth pace the Fed and many economists regard as the underlying trend.
But Fed policymakers also have begun debating whether the economy has reached a plateau as the stimulus from the Trump administration’s $1.5 trillion tax cut package and increased federal spending begin to fade.
The Fed’s policy statement did not explicitly take stock of the recent volatility in U.S. equity markets that led to the selloff in October, or address the possibility of a slowdown in global growth next year.
There were no updated economic forecasts released on Thursday and Fed Chairman Jerome Powell was not scheduled to hold a news conference.
The Fed’s policy decision was unanimous.
Reporting by Howard Schneider, Jason Lange and Dan Burns; Editing by Paul Simao
Data from the EU’s statistical office showed that the eurozone’s economy grew by 0.2pc in the third quarter, half the pace of the second quarter.
Meanwhile, economic activity in Germany, which accounts for more than fifth of the EU’s output, dropped by 0.2pc.
Capital Economics said in a report on the numbers that it seemed likely that the disruption stemmed from emissions testing on new car production.
The new EU car tests became mandatory for all new models on September 1 and were introduced in the wake of an emissions cheating scandal.
Growth numbers were also dragged down by Italy whose economy flatlined in the quarter. There was no new third quarter figure given for Ireland which grew 2.5pc in the second quarter of the year, by far the fastest pace in the euro area.
In September, seasonally adjusted industrial production fell by 0.3pc in the euro area – a slowdown from 1.1pc growth in August.
Ireland once again led the pack with industrial output rising a whopping 12.9pc from a year earlier.
This year will mark the fifth consecutive year of eurozone growth although the numbers have started to soften since the summer.
TOKYO — The Japanese economy shrank at an annualized rate of 1.2 per cent in July-September, as consumer spending, investment and exports fell, according to government data released Wednesday.
Cabinet Office preliminary data showed seasonally adjusted gross domestic product — the total value of a nation’s goods and services — dipped 0.3 per cent in the third quarter from the previous quarter.
Dragging on growth for the world’s third-largest economy was diminished trade, with exports falling 1.8 per cent and imports dropping 1.4 per cent, the data show. Consumer spending and company investments were also down.
The economy grew for the previous April-June quarter, but contracted the quarter before that. That contraction, in the first quarter, ended the longest straight period of expansion for Japan in nearly three decades.
Harumi Taguchi, chief economist at HIS Markit in Tokyo, said natural disasters during the third quarter had weighed on consumer travel and spending, which meant growth could recover if such disasters don’t happen during the year’s final quarter.
The closure of a major airport in the western Kansai area after a typhoon was one of the natural disasters that brought down growth, he said. A major earthquake also hit the northernmost island of Hokkaido during the quarter, causing fatal landslides and widespread blackouts.
Until recently, Japan has been keeping up moderate growth under Prime Minister Shinzo Abe’s “Abenomics” policies based on a deflation-fighting stimulus program of cheap lending.
But other factors are hurting the economy, such as the nation’s continuing labour shortage and slow wage growth.