Fed says economy improving; September rate hike in view

Wed Jul 29, 2015 4:21pm EDT
 
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By Howard Schneider and Michael Flaherty

WASHINGTON (Reuters) - The U.S. economy and job market continue to strengthen, the Federal Reserve said on Wednesday, leaving the door open for a possible interest rate hike when central bank policymakers next meet in September.

Following their latest two-day policy meeting, Fed officials said they felt the economy had overcome a first-quarter slowdown and was "expanding moderately" despite a downturn in the energy sector and headwinds from overseas.

They nodded in particular to the "solid job gains" seen in recent months.

"On balance, a range of labor market indicators suggest that underutilization of labor resources has diminished since early this year," the Fed said in a policy statement that kept rates unchanged.

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 U.S. 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 U.S. 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.   Continued...

 
An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013.  REUTERS/Jonathan Ernst