US Federal Reserve holds interest rates

(AAP)
(AAP)

The US Federal Reserve has kept interest rates on hold, but signalled that it will hike rates before the end of the year.

The announcement has prompted a rise in US share prices and a lift in the New Zealand dollar.

The decision has also highlighted the divisions within the Federal Reserve's decision-makers about when rates should be increased.

The Fed's policymaking committee announced at 6am New Zealand time that it was keeping its key overnight lending rate to a range of 0.25 to 0.5 percent.

The Dow Jones Industrial Average rose by 100 points after the announcement, at 6am New Zealand time. The broader S&P500 gained around 0.7 percent in value.

The New Zealand dollar had risen to 73.38 US cents by 7am New Zealand time, compared to 73.19 cents an hour earlier.

The Fed's Open Market Committee said the case for an increase in the federal funds rate has strengthened but decided to wait for further evidence of continued progress toward its objectives.

"Although the unemployment rate is little changed in recent months, job gains have been solid, on average."

"Household spending has been growing strongly but business fixed income has remained soft."

The markets had widely expected that the Fed would keep its key lending rates unchanged. What investors wanted to know was when the Fed might lift rates. It now looks like there will be one rate increase before the end of the year.

The Fed could lift in November, but analysts say it is more likely the Fed will wait until after the US Presidential election and hike rates by 0.25 percent in December.

Although the Fed has opted to keep rates on hold, the announcement revealed there are divisions among the policymakers about what to do.

Three members of the policymaking committee dissented from the decision.

Federal Reserve Bank of Kansas City President Esther George, Federal Reserve Bank of Cleveland President Loretta Mester and Federal Reserve Bank of Boston President Eric Rosengren voted no on holding rates steady.

They all wanted to go ahead and hike today.

The Fed's announcement came three hours ahead of an announcement on interest rates from New Zealand's Reserve Bank.

It is expected to keep the Official Cash Rate on hold at 2 percent, but also signal that there is likely to be an interest rate cut before the end of the year.

Economists and traders will be looking closely at the language the Reserve Bank uses. Last time the RBNZ said that it believed "further policy easing will be required."

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