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Fed Remains Patient About Timing of First Rate Increase.

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The Federal Reserve remains on course to raise interest rates later this year despite signs that the global economy is cooling.

In the release of this months Federal Open Market Committee policy statement the FOMC repeated its promise to take a “patient” approach to raising rates, stating that “economic activity has been expanding at a solid pace”.

Policy makers also noted that inflation “is anticipated to decline further in the near term,” adding that price gains are likely to “rise gradually toward 2 percent over the medium term” as transitory effects of low energy prices dissipate.

Today’s statement follows a tumultuous few weeks in global markets during which time the European Central Bank has announced a massive 60 billion euros a month quantitative easing program and worries continue about the state of the Chinese economy.

In deciding the timing of its first interest-rate increase since 2006 the Fed is being forced to confront divergent economic forces. Surprisingly strong job gains argue for tightening sooner, while inflation held down by a plunge in oil prices and a cooling global economy provides grounds for delay.

 

Low oil prices a mixed blessing

The Fed also noted that with oil prices near their lowest for six years, inflation is likely to remain below the Feds long-term inflation target of 2 percent.

While economic reports out yesterday indicated that cheap oil is a boon for households but a mixed blessing for companies.

This was highlighted by Januarys consumer confidence report which soared in to the highest level in more than seven years as gasoline prices fell, while orders for durable goods unexpectedly fell for a fourth straight month, signalling the global slowdown is weighing on manufacturers.

Policy makers are also concerned about stagnant wages: which point to continued labor-market slack. Average hourly earnings increased by just 1.7 percent over the 12 months ended in December, the smallest gain since October 2012.

 

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Simon G

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