September rate hike gaining traction amid improving US economy

July 30, 2015 08:33
Job seekers wait in line outside a US hiring center. Federal Reserve officials  say the job market has seen solid gains in recent months. Photo: Reuters

Federal Reserve officials are leaning toward a possible interest rate hike in September as the US economy continues to improve.

They said the economy is "expanding moderately" despite a downturn in the energy sector and headwinds from overseas after overcoming a first-quarter slowdown.

Recent months have seen "solid job gains", the central bank said after its latest policy meeting, according to Reuters

"On balance, a range of labor market indicators suggest that underutilization of labor resources has diminished since early this year," it said.

It kept rates unchanged but opened the possibility of a widely expected liftoff in September when the Federal Open Market Committee meets again.

That language and other small changes in the statement mark an upgrade in the central bank's view of labor conditions since its last policy meeting in June when it said labor slack had "diminished somewhat."

The Fed also said it now only needs to see "some" more improvement in the labor market, a qualification that analysts said strongly suggested it believes the recent solid US job gains will continue.

"They slightly lowered the hurdle for a rate hike by adding the word 'some' to their conditions required for further improvement in the labor market," said Shyam Rajan, head of US interest rate strategy at Bank of America Merrill Lynch.

Although the Fed may have ramped up expectations of a rate hike in September, it didn't give a clear signal of its plans.

Besides the additional improvement on the labor front, it said it also needed to be more confident that low inflation will rise to the 2 percent medium-term target.

US Treasury prices were largely unchanged after the Fed statement. Sttocks rose and the dollar was stronger against a basket of currencies.

The Fed's policy statement also retained language that risks are "nearly balanced", suggesting it is still more concerned about a new economic downturn rather than of rapidly rising inflation.

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