Federal Reserve leaves key interest rate unchanged
The Federal Reserve will be raising interest rates someday — but not now.
After signaling for months that the central bank’s Open Market Committee would raise rates first in June, then at Thursday’s two-day meeting, the benchmark U.S. interest rate now seems set to finally start heading up from zero by December.
“They should have raised rates, but it’s not a surprise that they didn’t,” said PNC Bank economist Kurt Rankin.
Rankin is one of many economists and analysts who say the U.S. economy is strong enough to start the process of getting rates moving back toward normal. “Normal monetary policy can be absorbed by the U.S. economy and should be pursued at this time.”
Since the end of 2012, the Fed has been weighing when to raise rates from the historic lows it set more than six years ago during the great recession. But the continued turmoil in foreign markets that’s roiled U.S. stocks, combined with prolonged consumer skittishness at home and a weak U.S. labor market always prompted the central bank to back off.
Those factors are still concerns. Fed Chairwoman Janet Yellen cited “heightened uncertainness abroad” as prompting the delay, in addition to the Fed’s official statement, which said the bank wants to see “some further improvement in the labor market” and become “reasonably confident” that inflation is ticking back toward the Fed’s goal of 2 percent. As of August, the annual inflation rate in the U.S. was 0.2 percent.
But at this point, the Fed appears to be pushing on a string. Without substantial changes to U.S. fiscal policy to raise government spending and bring about new policies to encourage businesses and investors to spend rather than sit on cash, the Fed’s monetary policy alone can’t raise enough pressure to boost economic growth.
“Monetary policy has accomplished little, if anything in spurring economic growth,” Rankin said. “It did a good job of putting a floor under the recession, but the goal of lowering interest rates is to encourage consumers and business to borrow, and growth in borrowing has not been encouraged by the Fed’s zero interest-rate policy.”
While a quarter-point increase in rates wouldn’t put much of hit on interest rates for mortgages, credit cards or business loans, it would set the Fed on a path of systematically raising rates to a level that would still be far from the average historical rate of 5.5 percent. But even modestly higher rates would give the Fed something to cut if another shock hits the U.S. economy in the next few years.
“A normalized interest rate rising over the coming years gives the Fed some dry powder to work with if there is some downturn,” Rankin said.
Whenever the Fed does finally yell, “Hike!” consumers won’t feel the sting, notes Greg McBride, chief financial analyst at the consumer finance website Bankrate.com. But in the meantime, rates will stay low and consumers should take advantage.
“This means the window of opportunity remains open to do things like grab zero percent balance transfer offers on credit etranf cards, to refinance out of your adjustable-rate mortgage into a fixed-rate loan, and to see if your lender will permit you to fix the interest rate on the outstanding balance on your home equity line.”
A bump of a quarter of a percentage point won’t translate into significantly higher rates for consumers, especially in competitive lending markets, such as auto loans, McBride added.
“The rates we’re seeing on auto loans at banks and credit unions are the lowest we’ve ever seen,” he said. “The difference of a quarter point to somebody borrowing $25,000 is $3 a month, so nobody’s going to downsize from an SUV to a compact based on a Fed interest-rate hike.”
McBride said the Fed’s decision to stand pat will continue insulting low interest rates for savers in bank accounts, certificates of deposit and money market account, too. “It delays what’s already going to be a tough slog back to respectability in terms of interest earnings,” he noted.
Whether the Fed decides to finally raise rates at it’s October or December meeting, the signs to watch are how the domestic stock market is behaving to the slowdown in the Chinese economy and continued depressed activity in Europe.
“The problem is that financial markets, stocks in particular, are addicted to the low rates,” McBride said. “So any time there’s the mere mention of raising interest rates, investors throw a temper-tantrum reminiscent of a 2-year-old.”
With stocks being whipsawed by the turmoil in the Chinese stock market and other global pressures, the Fed has shied away from adding any more volatility that could produce unintended consequences.
But whenever rates do rise, there’s really no risk to a U.S. economy that is fundamentally not great, but still good.
“It’s not going to wreck the economy. It’s not going to bend consumers over the barrel,” McBride said. But does have to happen before the Fed can guarantee that the economy is completely recovered.
“If you’re waiting for world peace and harmony,” McBride said, “you’re never going to raise interest rates.”
Copyright 2015 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.