Federal Reserve holds U.S. interest rate steady

Federal Reserve holds U.S. interest rate steady

Central bank opts to keep interest rate where it has been since 2008

CBC News Posted: Sep 17, 2015 2:05 PM ET, Last Updated: Sep 17, 2015 3:45 PM ET, Source

 

The Federal Reserve kept its benchmark rate unchanged on Thursday, dashing hopes among some economists that America's central bank would hike lending rates for the first time in nine years.

 

The Fed kept its funds rate in a range between zero and 0.25 per cent, the same level it's been at since December 2008.

 

"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labour market and is reasonably confident that inflation will move back to its two per cent objective over the medium term," the Fed's open market committee said in a statement.

 

The main reason for the decision to hold off hiking is continuing gloom about the global economy which is looking even more uncertain than usual at the moment. Signs of a sharp slowdown in China have intensified fear among investors about the U.S. and global economy. And low oil prices and a high-priced dollar have kept inflation undesirably low.

 

Central bankers at the Fed meet every six weeks to decide on America's monetary policy. After standing on the sidelines since slashing rates to the bone in the last recession, there was much speculation that the central bank might move to raise interest rates for the first time in nine years.

 

Economists polled by Bloomberg had said there was about a 30 per cent chance of a rate hike today. The last time the Fed hiked interest rates was in June of 2006. After cutting it down from there, it hasn't moved its benchmark rate since December 2008 — a stretch of "2,466 days and counting," CIBC economist Andrew Grantham noted after the decision came out on Thursday.

 

Although it falls short of a formal inflation target the way the Bank of Canada does, the Fed says it makes policy decisions in part with a view to keep inflation around two per cent. The latest core inflation data shows the rate at 1.2 per cent, which gave the Fed enough of an excuse to stand pat again. The Fed now thinks inflation will average 1.7 per cent in 2016, still below its unofficial sweet spot.

 

Despite the inaction, there's a growing body of evidence to suggest the Fed is getting ready to hike, however. Thirteen of the 17 members on the Fed's open market committee are still saying a rate hike would be appropriate some time in calendar 2015, which means they're running out of time.

 

"There were hints that a gradual tightening cycle is close," Grantham said. "All told, it looks as if rates are still set to start rising this year, however there'll only likely be one move and we'll await Yellen's comments regarding whether this is more likely to occur in October or December."

 

Fellow economist James Marple at TD, for one, thinks December is looking more likely. By then, the Fed will have two more months of data to see how China's slowdown may spill over to the U.S. "If a rate hike is to occur this year – as the majority of FOMC members still expect – it will take place in December," he said.

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