Why rates are likely to stand pat for now

Elec­tion among rea­sons Fed seen not act­ing this week

Baltimore Sun - - FROM PAGE ONE - By Mar­tin Crutsinger

WASH­ING­TON — Six days be­fore Amer­i­cans choose a new pres­i­dent and Congress, the Fed­eral Re­serve is ex­pected Wed­nes­day to leave its bench­mark in­ter­est rate alone but pos­si­bly sig­nal that it ex­pects to raise it in De­cem­ber.

From job growth to home pur­chases, the U.S. econ­omy has been demon­strat­ing its re­silience seven-plus years af­ter it be­gan re­cov­er­ing from the Great Re­ces­sion. The econ­omy grew at a re­spectable 2.9 per­cent an­nual pace in the Ju­lySeptem­ber quar­ter, the gov­ern­ment es­ti­mated last week. The un­em­ploy­ment rate is 5 per­cent, typ­i­cal of a healthy econ­omy. The hous­ing mar­ket has largely re­cov­ered. Un­der Chair Janet Yellen, the Fed­eral Re­serve has taken care to avoid sur­pris­ing mar­kets.

The econ­omy’s gains have put the Fed on the verge of re­sum­ing the rate in­creases it be­gan in De­cem­ber, af­ter hav­ing left its bench­mark rate at a record low near zero for seven years. Still, when the cen­tral bank ends this week’s pol­icy meet­ing, most Fed watch­ers ex­pect the mes­sage to be a con­tin­u­a­tion of the wai­t­and-see stance it’s taken for nearly a year.

Yet, the same an­a­lysts have pre­dicted that when the Fed meets again in mid-De­cem­ber, it will raise its bench­mark short-term rate slightly.

Here are three rea­sons the Fed isn’t likely to raise rates this week:

Un­der Chair Janet Yellen, the Fed has taken care to avoid sur­pris­ing mar­kets, es­pe­cially if the sur­prise could trig­ger an un­pleas­ant re­sponse in fi­nan­cial mar­kets.

A gauge of in­vestor sen­ti­ment puts the pos­si­bil­ity of a Novem­ber rate in­crease at 6 per­cent (and at 73 per­cent for a De­cem­ber hike). The Fed is aware that a sur­prise in­crease this week would not only likely send stock and bond prices plung­ing but also ig­nite crit­i­cism of the Fed for hav­ing failed to pre­pare in­vestors.

In a re­cent speech, Yellen said she might be open to “tem­po­rar­ily run­ning a ‘ high­pres­sure econ­omy’ ” to help heal some lin­ger­ing dam­age from the re­ces­sion and to try to boost spend­ing and in­vest­ment by con­sumers and busi­nesses. By “high pres­sure,” Yellen meant an un­em­ploy­ment rate be­low a level as­so­ci­ated with a healthy econ­omy and an in­fla­tion rate above the Fed’s 2 per­cent tar­get. Her com­ments were taken to mean the Fed was in no hurry to raise rates even if it’s likely to do so in De­cem­ber.

An­a­lysts said that just by not­ing the po­ten­tial ben­e­fits of a “high-pres­sure” econ­omy, Yellen was cast­ing her vote for a go-slow ap­proach as long as in­fla­tion re­mained un­der con­trol. With next week’s elec­tions loom­ing, the Fed — which is sup­posed to op­er­ate in­de­pen­dently of pol­i­tics — wants to avoid any per­cep­tion that it had acted in a way that might tilt the out­come of the vote. Repub­li­can crit­ics have fre­quently ac­cused the Fed, un­der Yellen and be­fore her un­der Ben Ber­nanke, of in­ject­ing it­self into the po­lit­i­cal arena through its pol­i­cy­mak­ing.


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