Key rate stays as is, Fed decides

Ann Santiago
September 23, 2017

The US central bank's Federal Open Market Committee (FOMC) held its main Fed funds rate at a range between 1%-1.25%, retaining an "accommodative" stance that it expects will support further strengthening of the labour market and a return to its target rate of inflation at 2%.

Fed officials also expect both low unemployment and low inflation to persist over the next several years, a curious combination that economists are struggling to understand.

U.S. Treasury prices were little changed Thursday, leaving the 2-year Treasury yield near an nearly nine-year high after the Federal Reserve on Wednesday indicated that it still plans to deliver another rate increase in 2017.

"Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term", the Fed said.

The big news yesterday had less to do with the fed funds rate (the benchmark interest rate) and instead focused on the official unwinding of stimulus from the Federal Reserve.

It forecasts only two increases in 2019 and one in 2020.

While the U.S. economy and especially its labor market has been relatively strong - unemployment has been below 5% since early 2016 - there has not been much indication that prices are starting to seriously accelerate, which traditionally prompts the Fed to pull back the reins and raise rates. The resolution of the stand-off over the United States debt ceiling in Congress has removed the final obstacle to the decision, which the Fed said would proceed at a fixed monthly level that can be adjusted as needed to be either faster or slower.

In November 2008, in the midst of the financial crisis, former Fed Vice Chair Alan Blinder says, the central bank had already exhausted its main tool to fight recessions. Beginning in October, the central bank will gradually start selling its huge portfolio of Treasurys and mortgage securities that were purchased during the radical experiment known as quantitative easing (QE). That neutral rate dropped to 2.9 percent in the new forecast, down from 3 percent in the Fed's June forecast. It said then that higher energy and other costs have the potential to move inflation higher. That has now changed and when the programme gets up to speed the Fed will be reducing its balance sheet by $600 billion a year'.

While some analysts are looking ahead to interest rate projections for 2020, it is worth noting that it is unclear who will be leading the Fed at that time.

It means the Fed joints two other central banks in "normalising" policy.

"In the longer run, we may see government infrastructure spending in the areas most affected, a move that will provide some small fiscal stimulus".

In recent days‚ the local currency has come under renewed pressure as the dollar recovered because of improved perceptions that the US Fed could raise rates in December.

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