Fed Doesn’t Raise Rates… For Now

Filed under: Market Comentary

On Wednesday, the Federal Reserve decided that a stagnant unemployment rate is the main reason to hold off on an interest rate hike, according to USA Today reporter Paul Davidson.

fed2Janet Yellen, the Fed Chair explained to reporters that despite having solid job growth in 2016, the unemployment rat has been stuck at 4.9% because discouraged workers on the sidelines have been drawn into an improving labor market. Yellen mentioned that this a ‘positive’ development policymakers want to encourage by keeping rates low for a longer period of time.

Yellen said, “The economy has a bit more running room than might have been previously thought. We don’t want the economy to overheat.” She also explained that the possibility for a rate increase “has strengthened” and that a move is expected later in 2016.

According to Davidson, the Fed strongly suggested that action late this year is likely. After a two-day meeting, the Fed stated, “Near-term risks to the economy outlook appear roughly balanced, economic activity has picked up, and job gains have been solid.”

Scott Anderson, chief economist of Bank of the West added, “They were trying to tee up markets for a rate hike before the end of the year.”

The Fed has kept its benchmark rate at 0.4% and explained that inflation continues to run below its annual 2% target, giving officials time to act.

Fed officials said that China’s slowdown, weak U.S. job growth, the United Kingdom’s Brexit vote, and financial market turbulence are the primary reasons for not raising the Federal Funds Rate this month. Even though these concerns have eased, Yellen pointed to weak productivity gains that are likely to temper economic growth over the longer term.

A few other points of information include that the Fed would bring down the median estimate benchmark rate to 0.6% at the end of the year, which is down from the previous forecast of 0.9%. Fewer rate hikes are also expected over the coming years, projecting the key rate to be 1.1% at the end of 2017 and 1.9% by the end of 2018. These are lower than projected, which was 1.6% and 2.4%, respectively.

Finally, officials also downgraded their economic outlook, expecting growth of 1.8% this year, lower than the 2% forecast.

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