Why rates are likely to stand pat for now
Election among reasons Fed seen not acting this week
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.