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3 Takeaways From Fed's Move to Leave Rates Steady but Hint at Hike

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Thursday, 03 Nov 2016 09:36 AM

With six days before Americans choose a new president, the Federal Reserve sent a dual message Wednesday: It isn't yet time to raise interest rates.

But it's getting very close.

After its latest policy meeting, the Fed dropped hints that it might resume raising rates at its next meeting in mid-December — a step that would likely lead to some higher loan rates for consumers and businesses. The Fed most recently raised rates in December last year but has since remained on the sidelines.

In a statement Wednesday, the Fed said nothing explicit about considering a rate hike at its "next meeting" — words it had used last year before it raised rates in December. But the brighter economic portrait it sketched Wednesday suggested that a rate increase is edging closer.

A rate hike would mean that the Fed has concluded that the economy is now sturdy enough for the central bank to resume withdrawing the extraordinary aid it provided during the Great Recession.

Here are three takeaways from the statement the Fed issued:

A STEADY ECONOMY

The Fed described a strengthening job market, rising consumer spending and improved economic growth after a weak start to the year. All of that helps explain why it said the case for a rate hike has "continued to strengthen."

As it has before, the Fed said that even after it resumes raising rates, it's confident that the economy will expand moderately and the job market will strengthen.

The statement noted that the unemployment rate has changed little in recent months. But the current rate — 5 percent — has long been associated with a healthy economy.

Repeating an observation it made after its previous meeting in September, the Fed said the risks to the economy were "roughly balanced." Translation? That the economy is no more likely to underperform the Fed's expectations than to exceed them — well, almost so.

FINALLY, HIGHER INFLATION

Inflation has remained chronically low for years. On Wednesday, the Fed said for the first time that inflation has risen since earlier this year, closer to its target rate of 2 percent. What's more, it no longer thinks inflation will stay low over the next couple of years.

This is notable because inflation has remained subpar, in defiance of many projections, even after years of super-low interest rates. Normally, ultra-low rates would be expected to accelerate price increases.

When inflation remains too low, it tends to suppress consumer spending, the lifeblood of the U.S. economy, as buyers await lower prices. Ultra-low inflation also makes the inflation-adjusted cost of loans more expensive.

GETTING THE TIMING JUST RIGHT

The Fed's decision to leave rates alone Wednesday had been widely expected. A big reason was next week's elections. The Fed is supposed to operate completely independent of politics, and it surely wanted to avoid any suspicion of acting in a way that might affect Tuesday's vote.

What's more, some analysts think the Fed is mindful that an unexpected victory by Donald Trump next week could jolt global markets and possibly cause other repercussions. Against that backdrop, the Fed would want to avoid putting investors on edge, even before Tuesday, with an unexpected rate increase.

"The timing was poor for an actual move this time because we have a little election coming up next Tuesday," said Carl Tannenbaum, chief economist at Northern Trust and a former Fed official.

By contrast, the Fed's December meeting appears to be a more suitable time for a rate increase. By then, whatever fallout the election might produce will possibly have settled, at least somewhat.

And Chair Janet Yellen is scheduled to hold a news conference after the Fed's December meeting. That would provide a platform for her to explain any action the Fed takes then and perhaps offer guidance on how many further rate increases are probable in 2017.

"When the tightening comes, likely in December, Janet Yellen will want to pair the increase with some context suggesting that rates may not increase again very soon" — a message that might calm financial markets, Tannenbaum said.

Could anything cause the Fed to put off a rate hike even in December?

"Only a shock — the election of Trump, or an external geopolitical or market event — can now prevent a December hike," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

 

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With six days before Americans choose a new president, the Federal Reserve sent a dual message Wednesday: It isn't yet time to raise interest rates.
fed, rate, hike, economy
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2016-36-03
Thursday, 03 Nov 2016 09:36 AM
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