Fed Keeps Rate Hike On Hold

Janet Yellen, vice chair of the Board of Governors of the Federal Reserve System, and President Barack Obama's nominee to be the next Federal Reserve chair, smiles as Obama speaks in the State Dining Room of the White House in Washington, Wednesday, Oct. 9, 2013, where the president announced he is nominating Yellen to be chair of the Federal Reserve, succeeding Ben Bernanke. (AP Photo/Charles Dharapak)

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Today the Federal Reserve has decided to hold interest rates steady which is putting heavy pressure on the U.S. dollar in trading against a basket of currencies.

By a vote of 9-1 Fed committee members decided against raising interest rates at the September meeting.

Fed committee members released a statement today that explained the process for determining how long to hold rates at the current target level.

The statement reads that “an assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

Economists have been mostly undecided about whether committee members at the Federal Reserve are ready to get the ball moving with an interest rate hike during this month’s meeting, which includes an inflation and GDP projection survey, or else wait until later in the year to increase the interest rate at the federal funds which is barely above zero at 0.25 percent.

The federal funds interest rate has been held at 0.25 percent since December 2008 during the depths of the global recession and interest rates haven’t even risen since 2006.

Aside from a slightly disappointing August non-farm payroll report, job growth has been decent in the U.S. economy.

The August non-farm U.S. jobs report showed that payroll growth increased by 173,000 in August, missing the estimate of 225,000 from briefing.com but the unemployment rate dropped to a 7 year low at 5.1 percent.

During the past 3 month, job gains have been solid and averaged 221,000 per month.

Over the past 12 months, job gains have risen even higher,  averaging 247,000 per month.

Fed members initially wanted to wait until later in 2015 to decide about raising interest rates because the 1st quarter of 2015 (1st 3 months) saw very cold winter weather that took a toll on U.S. GDP which increased only 0.6 percent.

Since the first quarter of 2015, economic activity has heated up and the latest reading on 2nd quarter GDP showed that the U.S. economy grew by a robust pace at 3.7 percent in the 2nd quarter.

Headwinds

Some of the fundamental weaknesses that are causing Fed committee members to hold off on raising interest rates include low inflation levels due to a strengthening U.S. dollar  in 2015 and falling oil prices which hit a 6 1/2 year low in recent weeks and has added deflationary pressures to the economy.

The Fed’s preferred inflation gauge, the personal consumption expenditure (PCE) is still showing weakness and is well below the Fed’s 2 percent inflation target.

July price index for PCE increased 0.3 percent from July a year ago.

The July PCE price index, excluding food and energy, increased 1.2 percent from July a year ago.

Global economic weakness is also weighing down on investment appetite.

China’s economy, which carried the global economy during the Great Recession beginning in 2008, has been showing softness and a recent decision by China’s central bank to devalue their currency has spooked global markets and sent the dollar higher.

Fed Statement

Here is the Fed’s policy statement released today:

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting

-Johnathan Schweitzer

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