The Fed stands pat on interest rates

The Scotsman Guide - Victor Whitman - 21 SEP 2016

The Federal Reserve has decided to leave interest rates unchanged for yet another month.

As widely expected, the central bank’s Federal Open Market Committee (FOMC) took no action Wednesday following the two-day meeting, although three of the 10 voting members broke ranks and voiced support for raising rates in September.

The lack of action likely means the federal funds rate will remain far below the historic norm through the presidential election. The Fed next meets in early November. Most analysts believe that meeting is too close to the presidential election for the FOMC to take action on rates, and the next "live" meeting won't come until December.  

During a news conference, Fed Chair Janet Yellen responded to questions lodged by her critics that the committee had kept interest rates artificially low to appease Wall Street and the Obama administration, and was seeking any excuse to avoid a rate hike prior to the election. The FOMC raised rates last December by a quarter percentage point off near zero, where rates had hovered since the recession. Yellen also was asked directly to respond to attacks by Donald Trump that the Fed has maintained its easy-money policy in support of the presidential campaign of Hillary Clinton.

Yellen said that the committee's decisions were solely focused on the economy. 

"We do not discuss politics at our meetings, and we do not take politics into account in our decisions," Yellen said. Yellen hinted that a rate hike could come in December and denied that a move was automatically off the table in November.

"Every meeting is live," she said.

On the economy, Yellen said the case for raising rates had strengthened, but the majority on the committee felt it was appropriate to wait and see if the low levels of inflation move up. She described the current policy as "moderately accommodative," and said the economy is showing no signs of overheating. 

Inflation, excluding oil and food prices, is running at around 1.5 percent annually, which is under the Fed's 2 percent target. An average of 180,000 new jobs are being added each month. Yellen noted that the unemployment rate, at 4.9 percent, hasn't moved down much, a sign that a greater number of people are returning to the labor force.  

"We are generally pleased with how the U.S. economy is doing," she said. On the downside, business investment continues to lag. 

FOMC members Esther George, Loretta Mester, and Eric Rosengren went against the majority, voting to raise the rate by a quarter percentage point. In recent meetings, only George had advocated for a hike. 

Earlier this month, several Fed officials gave statements that raised expectations for a September rate hike, but the markets and analysts have been betting against it. 

"We have been expecting a December rate hike just because the majority of the voting members on the FOMC have made it clear that they are going to approach an increase with caution just because rates are so low," said Danielle Hale, an analyst with the National Association of Realtors. "They would rather err on the side moving too slowly to increase rates versus too quickly. It is also not terribly surprising that we are starting to see a little more dissent. That is generally what you see before you see a consensus formed for additional rate hikes."