The South African Reserve Bank headquarters building in Pretoria. Picture: THE TIMES
The South African Reserve Bank headquarters building in Pretoria. Picture: THE TIMES

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THE US Federal Reserve (Fed) held interest rates steady on Wednesday night and indicated moderate US economic growth and "strong job gains" would allow it to tighten policy this year, with fresh projections showing policy makers expected two quarter-point hikes by year end, half the number seen in December.

However, it noted that the US continued to face risks from an uncertain global economy. "A range of recent indicators, including strong job gains, points to additional strengthening of the labour market," it said.

The dovish Fed stance means the dollar could weaken, which will support the rand. A firmer rand eases the pressure on the inflation outlook and supports unchanged interest rates on Thursday by the Reserve Bank.

The Fed’s move would be closely monitored by the Reserve Bank and coincides with a visit to SA by rating agency Moody’s, which has put SA on notice for a downgrade. Consensus is for the repo rate to remain unchanged at 6.75%.

But chief economist for Africa at Standard Chartered Bank, Razia Khan, has forecast another 50 basis-points rate hike due to political factors and their effect on the rand. "As perceptions of political risk in SA alter, and the rand comes under pressure, we believe that the Reserve Bank will need to act earlier, and perhaps more aggressively, to underscore its commitment to a 3%-6% inflation target," she said.

Inflation picked up in recent months," the Fed said in a policy statement — in which it kept the target range for its overnight lending rate at 0.25% to 0.50%.

"However, global economic and financial developments continue to pose risks" and will keep inflation low for the remainder of 2016," it said.

Policymakers projected weaker economic growth and lower inflation this year and lowered their estimate of where the targeted lending rate would be in the long run to 3.30% from 3.50% — a signal that the economic recovery would remain tepid.

The interest rate outlook is a shift from the four hikes expected when the Fed raised rates in December for the first time in nearly a decade. The majority of policymakers now said they expected it would be appropriate to raise rates by about a half a percentage point by the end of this year.

"Our first take on this is that it probably leans slightly more dovish, relative to expectations," said Tom Porcelli, chief US economist at RBC Capital Markets in New York.

The dollar fell against both the euro and the yen in the wake of the statement. Bond yields from two to 10 years hit session lows, while stock markets rallied, with the S&P 500 hitting its highest intraday level since January 4.

The new outlook came as the Fed attempts to steer through recent global market volatility and keep its rate hike plans somewhat intact.

The Fed had adopted a cautious approach at its last policy meeting in January, amid a sell-off on financial markets, weaker oil prices and falling inflation expectations. As in its January policy statement, the Fed did not say directly how it regards the balance of risks to the US economy.

Fed policymakers also see continued improvement in the job market — with the unemployment rate expected to decline to 4.7% by the end of the year and to fall further in 2017 and 2018. The policymakers marked down their forecast for inflation this year to 1.2% from 1.6%, but see it recovering to close to the central bank’s 2% medium-term target next year.

Reuters