Fed points to improved job market, but leaves rates unchanged

The U.S. Federal Reserve is marking solid job gains and a pickup in household spending and the housing sector, but has left its benchmark interest rate unchanged after its latest meeting.

In a statement released Wednesday, the U.S. central bank said economic activity has been expanding moderately in recent months, but inflation is still running below its long-term objectives.

Investors typically scrutinize Fed statements for changes of language that might indicate when it plans to raise interest rates.

Wednesday's statement certainly points to an improving outlook for the U.S. economy and could reaffirm predictions of an increase in rates in September. However, the Fed, as usual, made no commitments on timing.

It all depends on the data

The U.S. central bank has kept its benchmark interest rate at the same low level since December 2008, but many analysts believe it will move to raise rates after its next meeting. Its statement says any move will depend on economic developments in coming months.

Fed Chair Janet Yellen has left little doubt that the Fed is preparing to raise short-term rates by year's end from the near-zero lows it set at the depths of the 2008 financial crisis. Earlier this month, she told Congress that she thought the economy not only can tolerate but needs higher rates.

In today's statement, the Fed was particularly positive about the improvement in the job market.

"On balance, a range of labour market indicators suggests that underutilization of labour resources diminished somewhat," it said.

"Inflation continued to run below the committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized," it said.

Loonie lower, stocks higher

The Canadian dollar slipped to 77.31 cents US immediately after the Fed announcement and closed down a fifth of a cent at 77.21. The Bank of Canada cut Canadian interest rates earlier this month, putting downward pressure on the dollar.

New York stocks spiked higher at 2 p.m. on the initial release, but the markets seemed to reassess the import of the Fed's statement, falling again and then edging higher at mid-afternoon. The Dow closed up 121 points at 17,751 and the broader S&P index rose 16 points to 2,109.

The TSX roared ahead, climbing 225 points to 14,301, helped by stronger oil prices.

TD senior economist Michael Dolega noted the Fed's more upbeat take on the economy, though he said all predictions on when rates might change are dependent on data over the next few months.

"In our view, as long as the labour market continues to add 200,000 jobs in the next two reports and the jobless rate continues to tick down closer to 5 per cent, and core inflation begins to track higher, a September rate hike is very much in play and remains our base case scenario," he said in a note to investors.

Dawn Desjardins, assistant chief economist at RBC Economics, is firmer in expecting the Fed to begin hiking rates in September.

"Recent data point to a sharp rebound in economic growth in the second quarter of 2015." she said in a note to investors.

"We expect the second-quarter 2015 real GDP report will show that the economy grew at a 3 per cent annualized rate, thereby confirming that the mild 0.2 per cent dip recorded in the first quarter reflected transitory factors rather than a signal that the US economy had entered a period of very slow growth."