Federal Reserve holds interest rates steady
The Federal Reserve said Wednesday it is keeping its benchmark interest rate unchanged, while modestly upgrading the central bank’s longer-term economic outlook.
Concluding a two-day meeting, the Federal Open Market Committee (FOMC) announced that the federal funds rate -- what banks charge each other for overnight loans -- will remain at 0.25 percent to 0.50 percent.
“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 investment has remained soft,” the FOMC said in its policy statement.
The Fed also said risks to the economy have diminished since its last meeting in July.
“We’re generally pleased with how the U.S. economy is doing,” Fed Chair Janet Yellen said in a press conference to explain the FOMC’s decision, noting that committee members expect the labor market to continue growing at a healthy pace.
Three FOMC members dissented from the panel’s decision, an unusual level of disagreement from the Fed’s consensus view that underscores the growing support among policymakers for a rate hike.
“Despite the temporary hold, the committee sent a strong signal that a rate hike is imminent,” said National Association of Federal Credit Unions Chief Economist Curt Long. “Even after doing so, three members voted against the decision to hold off on a rate hike this month. It seems clear that barring a major setback, a rate hike is coming before the end of the year.”
The Fed’s effort to normalize monetary policy is being complicated by uneven economic growth this year. Although hiring has remained steady and wages are picking up, the nation’s GDP in the first half averaged just under 1 percent.
In a sign of that weak growth, inflation remains below the Fed’s 2 percent target. The FOMC attributes muted inflation to a slump in oil prices, as well as to falling prices of nonenergy imports. Yellen said the Fed expects inflation to rise gradually.
“We found the economy has a bit more running room,” she said. “Nevertheless, we don’t want the economy to overheat.”
Some forecasters had expected the Fed to raise borrowing costs this month, noting more hawkish pronouncements by policymakers, including Yellen, in recent weeks. The next opportunity for the FOMC to lift rates will be at its meeting in November, though many experts predict it will wait until December.
“I think they are laying the groundwork for a December rate hike, but after two disappointing GDP prints they want to wait and see if growth has actually recovered in [the third quarter],” said Brian Coulton, chief economist at Fitch Ratings, in a note.
The Fed last raised rates in December of 2015, the first hike since 2006.
Asked by a reporter to respond to claims by Republican presidential nominee Donald Trump that the Fed is shaping monetary policy to help President Obama and Democratic nominee Hillary Clinton, Yellen said: “We do not take politics into account in our decisions.”
“I have no concerns that the Fed is politically motivated,” she added.
Yellen, who as Fed chief also has a role in regulating the biggest U.S. banks, declined to weigh in on recent revelations that Wells Fargo (WFC) had opened millions of accounts on behalf of customers without their consent. But in answering a question about whether large banks should be broken up, she did say she doesn’t think large banks are too big to manage.