Fed Reserve Holds Rates; US Economy Slowed

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The US Federal Reserve is holding rates steady at a range between 0.75 per cent to one per cent.  The Federal Open Market Committee (FOMC) made the announcement on May 3 after its two-day policy meeting. In a statement issued after, the Fed noted that the economy slowed during the first quarter of 2017, but also downplayed its concern over the matter.

Fed’s statement

In its statement, the FOMC says, “The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2% over the medium term.”

This comes after the US Fed more recently increased rates twice, 25 basis points each time. The last time was in March 2017.

Expectations for the remainder of 2017

Industry experts forecast that this hold on rates is a temporary pause and the Fed’s statement supports that notion. It says there is strength in the labour market and economic activity, and points out that job gains are solid and unemployment rates have declined. Household spending rose modestly, and the fundamentals underpinning the continued growth of consumption remained solid. That being said, the expectation is interest rates will rise two more times in 2017.

According to the World Interest Rate Probability data provided by Bloomberg, the market’s expectations of a hike in June jumped to 97.5 per cent after this announcement.

The Trump threat continues, among other concerns

There is still concern about the new Trump administration and the tax cuts it plans on implementing. Once the size and scope of those cuts are clear, the Fed may feel more confident about raising rates more frequently.

Inflation remains a concern as it continues to run below the Fed’s target. In March, excluding energy and food, consumer prices declined and inflation continued to run somewhat below two per cent.

This announcement also means the cost of borrowing in the US will remain the same as floating rate loans will not be affected.

Fed seems to be more confident than Canada

The tone of the Fed has changed in the last few months. Since last year, it has gone from cautiously optimistic to confident as consumer and business sentiment improves.  In fact, for the last decade, the Fed has kept rates at record lows to allow liquidity in the market after the 2008-2009 housing crisis dried up credit across the US.  These slow and steady rate increases are being viewed by experts as a way for the Fed to nurse rates back to normal and tighten up lending for the first time in a decade.

The Bank of Canada remains out of step with the US Fed, as it has held rates steady for the last two meetings at 0.5 per cent.

The next US Fed rate announcement is June 14, 2017.

The next Bank of Canada interest rate announcement is May 24, 2017.

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