The Fed Still Has Not Raised Interest Rates in 2016
In a mostly expected move on Wednesday, the U.S. Federal Reserve decided not to raise interest rates at the September meeting of its Federal Open Market Committee (FOMC). The committee’s two-day meeting concluded with Fed officials voting to keep the U.S. central bank’s target range for the federal funds rate at 0.25 to 0.5 percent. The Fed has yet to raise interest rates in 2016, and there are only two FOMC meetings left before the end of the year. The FOMC raised interest rates for the first time in nearly a decade last December.
In a statement, the Fed said the FOMC determined that “the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
The Fed has two objectives when it makes its interest-rate decisions: reaching full employment and achieving an inflation rate of 2 percent. These two goals promote a strong economy and keep prices stable. And while the U.S.’s employment numbers have been strong in 2016, inflation remains low at 1.6 percent. At a press conference following the decision, Federal Reserve Chairwoman Janet Yellen explained the committee’s reasoning for its “cautious approach”:
So why didn’t we raise the federal funds rate at today’s meeting? Our decision does not reflect a lack of confidence in the economy. Conditions in the labor market are strengthening, and we expect that to continue. And while inflation remains low, we expect it to rise to our 2 percent objective over time. But with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives.
The question now—really, it’s one that’s been relevant for many months—is when the conditions will finally be right for the Fed to raise rates. Expectations matter when it comes to Fed decisions, because monetary policy changes the cost and availability of money—something that affects anyone who is a participant in the U.S. economy. Though the Fed weighs many factors regarding the domestic and global economy in its interest-rate decisions, the committee’s moving goal posts have economists and analysts wondering what it will take for a rate hike to happen.
The Fed’s updated projections can be read as a signal that there’s still going to be a rate hike in 2016: Fourteen of 17 FOMC members expect at least one before the end of the year. The median of committee members’ predictions is that the federal funds rate will be 0.625 by the end of 2016—which would mean one quarter-point increase this year, in either November or December at the FOMC’s upcoming meetings. If there’s a rate hike coming, it will be up to the Fed to realign the market’s expectations.