Fed Keeps Benchmark Interest Rate Steady

Fed policymakers decided to keep the federal funds rate in a range between one-quarter and one-half percent.

That’s where it’s been since last December when the Fed lifted the rate a quarter of a point from near zero, where it had been left for seven years as the central bank tried to support growth coming out of the Great Recession. Chair Janet Yellen and her colleagues at the Federal Reserve didn’t surprise anyone when they announced Wednesday they were not raising their benchmark interest rate.

Chair Janet Yellen and her colleagues at the Federal Reserve didn’t surprise anyone when they announced Wednesday they were not raising their benchmark interest rate.

In a statement, the Fed said “the case for an increase in the federal funds rate has strengthened” but the Fed “decided, for the time being, to wait”, deciding to keep its interest rate where it is, saying the U.S. economy is not yet ready to withstand a modest increase.

Since lots of consumer and business rates are linked to the federal funds rate, holding steady means car loans, many variable rate mortgage loans, the prime rate for business lenders — all those rates won’t go up either. The bank surprised markets with a rate hike in December but has stayed on the sidelines ever since.  A majority of economists who cover the Fed are expecting at least one more modest hike this year. That’s unlikely to come at its next meeting in November since the central bank has historically been reluctant to do anything so close to a U.S. election day. “A move is not imminent, i.e., not on November 2 or six days before the election,” BMO economist Michael Gregory said. Which means the most likely day for a change would be at their final meeting of the year on December 14.

“A move is not imminent, i.e., not on November 2 or six days before the election,” BMO economist Michael Gregory said. Which means the most likely day for a change would be at their final meeting of the year on December 14.

Yellen’s answer at Wednesday’s post-meeting news conference was that there is no inflation threat, so there is no hurry; and she said that if the Fed holds off raising rates, maybe even more people will find work and that the Fed was willing to sit on the sidelines for a while longer because it can afford to — low-interest rates are helping the economy, without causing too much harm.

“The economy has a little more room to run than previously thought,” Yellen said.

Yellen defended that view by pointing out that despite the robust job growth in recent months, a number of measures in the labor market haven’t improved.

While expected, the decision wasn’t unanimous. Three of 10 Fed members wanted to hike rates, but the majority opted to stand pat, for now.

“We view this statement as a set-up for a hike later this year,” TD Bank economist Michael Dolega said. “We believe that the Fed is running out of room to keep rates unchanged given the economic performance.”

Yellen tossed them a bone, saying she expected the Fed will at present raise rates once this year. That is well on the way to come when the policymaking Federal Open Market Committee meets in December. The committee has a meeting in November just before the presidential race; however, a rate hike appears to be exceptionally far-fetched because it might be seen as affecting the vote. All things considered, Yellen defended the Fed’s independence again Wednesday, saying its choices are made without political considerations.