Behind the scenes: Why the Fed decided not to raise rates


At the conclusion of its meeting, the Federal Open Market Committee announced it decided not to raise interest rates in September.

While the committee said that the case for an increased has strengthened, they decided to wait for further evidence on continued progress towards its objectives.

“Our decision does not reflect a lack of confidence in the economy,” said Janet Yellen, Federal Reserve System chair of the Board of Governors.

She explaining the Fed preferred to take a more cautious approach to see if current growth would continue.

Last month, The FOMC chose to forgo raising the federal funds rate in its latest July meeting as the market starts to recover from the initial impact of the U.K. choosing to leave the European Union.  

In fact, minutes from that meeting show that the Fed may not raise interest rates until December or later.

Working against a rate hike, inflation is currently short of the 2% mark that the Fed would like to see in order to increase rates, Yellen said.

Also, the U.S. Census Bureau showed that payroll employment increased in August, however it was not as much as experts previously predicted, and many said it would not be enough to raise interest rates.

That being said, non-farm payroll employment increased by 255,000 in July, far above what the ADP employment report on August 3 predicted.

“The Fed’s decision today to maintain stable rates appears to have been swayed by the August employment report, which failed to meet expectations,” said Steve Rick, chief economist of CUNA Mutual Group, which provides insurance and financial services for credit unions nationwide.

“The markets generally expected this outcome based on Fed funds futures markets, but it still comes as a bit of a surprise to me given the steady drumbeat of positive data and the overall trend of the stock market since the Brexit vote just over two months ago,” Rick said.

Household income also showed positive movement when it posted its first significant increase in eight years, data from the U.S. Census Bureau showed.

“Despite the temporary hold, the committee sent a strong signal that a rate hike is imminent,” said Curt Long, National Association of Federal Credit Unions chief economist.

“Even after doing so, three members voted against the decision to hold off on a rate hike this month,” Long said. “It seems clear that barring a major setback a rate hike is coming before the end of the year.”

The Fed projected the nation’s Gross Domestic Product to increase by 1.8% this year, slightly less than its prediction in June, Yellen said. This lowered expectation is due to a slow start to this year.

Despite that, however, the remainder of the year will bring a reboundFannie Mae predicted in its August 2016 Economic and Housing Outlook.

“This seems to have been one of the most divisive FOMC meetings in recent memory,” Capital Economics Chief Economist Paul Ashworth said. “As many as three of the current 10 voting members dissented, preferring an immediate rate hike, with Loretta Mester and Eric Rosengren joining previous hawk Esther George.”

“At the same time, however, looking at the new projections, three of the 17 Fed officials at the meeting now expect no rate hike whatsoever this year,” Ashworth said.

So interest rates will remain where they are for now. There are two meetings left this year, and a rate hike seems probable. Once again, however, there is nothing left to do but wait and see.

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