Go Ahead, Shop For That Car; The Fed Is Leaving Interest Rates Very Low
Federal Reserve policymakers left rates unchanged, saying they were worried about job growth and did not want higher rates to affect hiring.
Updated at 4:25 p.m. ET with comments from Fed Chair Janet Yellen
The Federal Reserve Board’s policymakers on Wednesday ended a two-day meeting by leaving interest rates unchanged. They cited a weaker jobs market as a key reason for taking no action.
“Although the unemployment rate has declined, job gains have diminished,” the Fed said in a statement.
The decision to stand pat was widely expected by economists, who also have been pointing to the slowdown in hiring as a reason to keep loans cheap.
Back in December, it had appeared that the Fed was about to begin a campaign in 2016 of consistently and persistently nudging interest rates higher, step by step. But so far, the Fed has taken no action this year.
At a news conference following the Fed meeting, Chair Janet Yellen made remarks that were seen as suggesting the Fed will continue to refrain from acting. The uncertain outlook for the U.S. and global economies means “our cautious approach to policy remains appropriate,” she said.
Chris Gaffney, president of World Markets at EverBank, said Yellen’s comments point “toward rates remaining unchanged through the end of 2016.”
Here’s the back story:
During the housing boom a decade ago, the Fed started pushing interest rates higher to tamp down excessive borrowing to buy real estate. But then home sales started to slow a bit, so the last time the Fed raised rates was in June 2006.
As the Great Recession started taking hold in late 2007, the Fed began lowering rates. It kept cutting and cutting until the federal funds rate — the rate banks charge each other for overnight loans — fell to virtually zero.
But that level was not normal. As the economy has healed in recent years, Fed officials have wanted to see lending rates return to more typical levels.
In December, Fed policymakers finally felt comfortable enough with the economy’s health to begin the long march back to “normal.” It started with a quarter-percentage-point bump up in the federal funds target, raising it to a range of 0.25 percent to 0.5 percent. Most economists figured 2016 would bring four more similar hikes.
But 2016 has not brought a smooth ride. Last year, employers were averaging 220,000 net hires a month, but this year, the pace of job creation has slowed dramatically. In May, employers added only 38,000 jobs.
Meanwhile, other global risks have increased. For example, on June 23, voters in the United Kingdom will decide whether to exit from the European Union. Many investors and economists fear such a move would be very disruptive to global markets. Until that vote outcome is known, markets will remain jittery.
And there has been uncertainty about the direction of U.S. economic policy, thanks to an unusual presidential election cycle.
All of the uncertainty has caused investors to seek out the safety of bonds issued by Germany and the United States. With so much demand, “safe” debt can be issued for little or no interest.
In other words, even if the Fed had tried to raise short-term interest rates, it probably wouldn’t have done much good for longer-term debt. So rather than shoot blanks, the Fed held its fire.
For you, that means borrowing costs should hold steady. That’s great news for car shoppers, homebuyers and credit-card junkies.
But really, it’s a disappointing development. The Fed had hoped that the U.S. economy, along with Europe and Asia, would be in better shape in 2016. The need to keep rates so extremely low means the economy is rolling forward, but after all of these years, it still needs training wheels.
That’s not to say all is doom and gloom. For example, retail sales have been strong, thanks to robust consumer spending. Measures of small business optimism have been inching up a bit. And there have been some signs of wages and wholesale prices moving up.
The Fed statement noted that “growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened.”
It’s possible that if voters in the U.K. remain in the EU, and the global economy seems to stabilize in coming weeks, higher lending costs could yet materialize for the second half of the year.
“Rates could move higher at the FOMC’s late July meeting if job growth rebounds in June as expected, financial market concerns fade, and inflation looks set to pick up,” PNC Chief Economist Stuart Hoffman said in an analysis before the Fed released its statement.
Afterwards, the analysis was updated to say the Fed now sounds “more cautious. The pace of fed funds rate increases over the next few years now looks to be lower.”