Federal Reserve Leaves Rates Unchanged

By Jennifer Schonberger Economic Indicators FOXBusiness

Fed leaves rates unchanged

FBN's Charlie Gasparino, Lou Dobbs, Stuart Varney and Maria Bartiromo on the Fed's decision to leave short-term interest rates near zero percent.

Federal Reserve policy makers decided against raising short-term interest rates, but set the stage for an increase later this year in one of the biggest cliffhangers for monetary policy in years.

In its policy statement, Federal Open Market Committee maintained prior guidance, saying its first interest-rate increase will come after “some further improvement in the labor market” and when officials are “reasonably confident” inflation will move back to the central bank’s 2% annual target.

Fed officials are closely watching recent volatility in the global markets for signs of deeper-rooted problems in the global economy that could spill over into the U.S economy. The statement noted "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."

Both the International Monetary Fund and the World Bank have lobbied the Fed to hold off from raising rates until the global markets and economy are on sounder footing. Analysis from Goldman Sachs maintains both the increase in bond yields and decline in stock prices since August have already “tightened financial conditions,” and if sustained would be equivalent of around three quarter-percentage point increases in interest rates. Now the focus shifts to policy meetings in October and December as the possible starting point for raising rates.

The Fed upgraded its economic outlook slightly for this year. The central bank sees the economy growing at 2.1% in 2015, up from its previous projection of 1.9%, and sees the economy expanding at 2% or more annually for the next three years.

The unemployment rate has fallen from a peak of 10% in 2009 to 5.1% in August. It’s now about where Fed officials put the long-run “natural” rate of unemployment. Nonfarm payrolls have averaged 247,000 per month over the past 12 months. The Labor Department recently reported 5.8 million job openings in July. The Fed forecasts that the unemployment rate is expected to edge down to 5% by the end of year. The central bank sees the unemployment rate falling to 4.8% next year and sees it holding steady through 2018.

Continue Reading Below

But while the job market has improved, inflation has fallen short of the central bank’s 2% target for over three years, underscoring the underperformance of the U.S. and global economies.The Fed's preferred indicator for inflation, the so-called PCE price deflator, is now running at just 0.3% year over year. Excluding volatile food and energy prices, inflation is running at 1.2% -- both measures are well below the Fed’s target.

In its new forecast Thursday, the Fed sees inflation returning to its 2% target by 2018. For this year, the Fed now projects lower inflation, just 0.4%. In June it had projected 0.7%. The central bank blamed low inflation on "declines in energy prices and prices of non-energy imports."

New interest rate projections indicate the Fed will increase interest rates only once this year, down from projections in June of twice. The central bank now forecasts a shallower path for interest rate increases than it did following the FOMC’s July meeting. The Fed now sees the Fed funds rate at 3.5% in the long run, compared to its previous projection in June of 3.8%.

The projections underscore previous comments from Yellen and the Fed that once the central bank starts to raise rates, the pace of increases will be “gradual.” Fed Vice Chair Stanley Fischer says that low inflation gives officials the leeway to increase rates slowly.  If global growth remains anemic that may be another reason for the Fed to raise rates gradually.
The Fed last raised its short-term federal funds rate in 2006, but cut them to near zero in 2008 during the financial crisis and have held them there to help the economic recovery. The Fed funds rate is the basis for short-term business, auto and consumer credit.

Richmond Fed President Jeffrey Lacker dissented among voting members on the committee, marking the first rate-setting FOMC meeting that was not unanimous this year.

What do you think?

Click the button below to comment on this article.