The sun rises to the east of the US Federal Reserve building in Washington DC.  Picture: REUTERS
The sun rises to the east of the US Federal Reserve building in Washington DC. Picture: REUTERS

WASHINGTON — The US Federal Reserve left interest rates unchanged on Wednesday but strongly signalled it could still tighten monetary policy by the end of this year as the labour market improved further.

The Fed said US economic activity had picked up and job gains were "solid" in recent months.

"The case for an increase in the federal funds rate has strengthened," the US central bank said in a statement following a two-day policy meeting.

It added that its rate-setting committee had decided against raising rates "for the time being", until there was more evidence of progress towards its employment and inflation objectives.

The Fed has held its target rate for overnight lending between banks in a range of 0.25% to 0.50% since December, when it raised borrowing costs for the first time in nearly a decade.

The central bank has appeared increasingly divided over the urgency of raising rates.

On Wednesday, Kansas City Fed president Esther George, Cleveland Fed president Loretta Mester and Boston Fed president Eric Rosengren dissented on the policy statement, saying they favoured raising rates this week.

At the same time, policy makers cut the number of rate increases they expect this year to one from two previously, according to the median projection of forecasts released with the statement. Three of the 17 policy makers said rates should remain steady for the rest of the year.

The Fed also projected a less aggressive rise in interest rates next year and in 2018, and cut its longer-run interest rate forecast to 2.9% from 3.0%. But in a sign of growing confidence, the Fed said the near-term risks for the economic outlook "appear roughly balanced". That means policy makers think the economy is about as likely to outperform forecasts as to underperform them.

Fed chairwoman Janet Yellen underscored the cautious approach of most of the central bank’s policy makers. “We judge that the case for an increase has strengthened,  but decided for the time being to wait for further evidence of continued progress toward our objectives.

“Since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future,” Yellen said during a press conference after the Fed meeting.

The Fed in December signalled that four rate increases were likely this year, but that was scaled back in March due to a global growth slowdown, financial market volatility and concerns about tepid US inflation.

The economy expanded sluggishly in the second quarter and added fewer jobs than expected in August. Inflation also showed signs of stirring last month.

The Fed’s decision, which came the same day that Japan’s central bank added a long-term interest rate target to its massive asset-buying program in an overhaul of its policy framework, was widely anticipated by economists.

The Fed has policy meetings scheduled in early November and mid-December. Economists believe policy makers would avoid a rate hike in November in part because the meeting falls just days before the US presidential election.

Reuters