Will the Federal Reserve hike rates or hold steady? Economists and investors will get their answer Thursday as the U.S. central bank's policy-setting panel wraps up its two-day meeting.
A September liftoff for the Fed funds rate – which has been at near-zero for almost seven years – was once considered a strong possibility. But a confluence of factors – global economic woes, market volatility and low inflation, to name a few – threatens to push a hike even further down the line. The implied probability of a Thursday rate move has ebbed to around 30 per cent, according to Bloomberg data.
Still, Thursday's outcome is far from certain.
The case for a hike
The U.S. economy is a bright light as the global outlook dims. After a rough first quarter marked by crummy weather, the U.S. economy roared back with a 3.7-per-cent annualized growth rate in the second quarter. The forecast for the remainder of 2015 is similarly rosy.
One of the Fed's mandates is to promote "maximum employment." Certainly, the U.S. labour market has vastly improved since the depths of the global financial crisis. The country's jobless rate dipped to 5.1 per cent in August, well below the 10-per-cent level seen in October of 2009. Further, a record number of job openings were seen in July. The Fed will need to act before the unemployment rate drops too low – at which point inflation is triggered.
The case for holding steady
This year, the Fed has flagged "international developments" as something to keep an eye on. On that front, much has happened since the Fed's last statement in July. Equities took a beating in August, notching their worst month in years as a stock plunge in China sparked a global selloff. China's economy has cooled off, raising concerns it could drag other major economies into slower growth, as well. Fed officials may choose to wait out any overseas uncertainty.
There's concern of some lingering weakness in the jobs market. The labour participation rate has dwindled in recent years, even as the economy has strengthened. The U-6 unemployment rate – a broader measure that includes all persons who are marginally attached to the labour force, along with those working part-time due to economic reasons – has steadily dropped, but remains well above pre-recession lows.
The other half of the Fed's dual mandate is fostering price stability. Inflation, however, is running below the Fed's 2-per-cent objective, even when stripping out volatile items such as energy prices.