Announcement: U.S. Federal Reserve Holds Rates Despite Hot Economy

Despite Hot Economy, U.S. Federal Reserve Holds Rates

The U.S Federal Reserve is holding rates steady at a range of 2 to 2.25 per cent at the conclusion of a two-day policy-setting meeting in Washington. This is despite the U.S. economy looking strong on every front. Unemployment is at a decade-low, wages are rising, and household and consumer spending is up.  Even more, the inflation rate remains in check at two per cent. The only slight downside is that business sentiment has moderated.

In the Federal Open Market Committee (FOMC) policy statement released after the announcement, the tone only changed slightly from the last announcement in September, when the Fed raised rates. It said the central bank will take a “gradual” approach to rate hikes going forward.

Furthermore, the statement said, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.”

And seeing as the midterm elections have wrapped up and a new trade deal is in place to replace NAFTA, forecasters believe rates are going higher and soon.

U.S. Federal Reserve Chairman Jerome Powell did not hold a news conference following the meeting, but this is the last time that will happen.  Beginning in 2019, Chairman Powell says there will be a news conference after each Fed meeting. There are eight held every year.

Reaction to announcement

The announcement to leave rates steady came as no surprise. Some journalists remarked at how this announcement may be the proverbial calm before the storm.

Here in Canada, economists reacted with little surprise. Leslie Preston is the Senior Economist at TD Bank. In her analysis she said, “I can’t see the difference. Can you see the difference? The changes in today’s FOMC’s statement versus September were quite minor. Basically reflecting another quarter of GDP data, and that today they left rates steady, and in September they hiked. This was about as ‘stay-the-course’ rate decision as they come.”

She also mentioned that treasury yields were up slightly after, with market participants perhaps expecting some acknowledgement of recent financial market volatility. Preston said she expects three more hikes in 2019.

BMO Deputy Chief Economist & Head of U.S. Economics Michael J. Gregory made his opinion clear in his note to journalists and industry experts after the announcement: “Bottom line: For the fourth December in a row, the Fed is going to raise rates.”

If the U.S. central bank raises rates soon, the Bank of Canada will feel more pressure to raise rates as well to ultimately align with U.S. policy. The BoC recently hiked its benchmark interest rate by 25 basis points to 1.75 per cent, and like the U.S., Canada’s economy is doing well, signalling more rates hikes to come in 2019. Forecasters predict at least three in the new year.

The next Fed announcement is scheduled for December 19.

The next Bank of Canada announcement is on December 5.

Related Topics

Economic News / RSM News

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