Why Fed will likely leave rates alone
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 July-September quarter, the government estimated last week. The unemployment rate is 5 percent, typical of a healthy economy, down from 10 percent in 2009. The housing market, whose meltdown triggered the 2008 financial crisis and the recession, has largely recovered.
The economy’s gains have put the Fed on the verge of resuming the rate increases it began in December last year, 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 wait-and-see stance it’s taken for nearly a year.
Yet by a wide margin, the same analysts have predicted that when the Fed meets again in mid-December, it will raise its benchmark short-term rate slightly — a move likely to lead to higher borrowing rates on some loans for consumers and businesses.
Here are three reasons the Fed isn’t likely to raise rates this week:
It hasn’t telegraphed a hike
The Fed hasn’t signaled that
it will act this week. That simple fact alone has given confidence to most analysts that a rate hike now is highly unlikely. Under Chair Janet Yellen, the Fed has taken care to avoid surprising markets, especially if the surprise, such as a rate hike, could trigger an unpleasant response in financial markets.
A gauge of investor sentiment puts the possibility of a November rate increase at just 6 percent. (The likelihood of a December hike is estimated at 73 percent.)
The Fed is aware that a surprise rate 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.
Last year, after a policy meeting in late-October, the Fed had said it would consider “whether it will be appropriate to raise the target range at its next meeting” in December. In saying so, the Fed allowed investors to anticipate the modest rate increase it then announced in December. It’s possible, though far from certain, that in its post-meeting statement this week, the Fed will send a similar signal that a rate increase is likely in December.
Tolerance for ‘highpressure economy’
In a recent speech, Yellen said she might be open to “temporarily running a ‘high-pressure economy’” to help heal some still-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.
Yellen didn’t say the Fed was necessarily prepared to embrace a high-pressure economy. She even offered reasons why doing so might risk destabilizing financial markets or allowing inflation pressures to run too high. But analysts said that just by noting the potential benefits of a “highpressure” economy, Yellen was casting her vote for a go-slow approach to rate increases as long as inflation remained under control. That would argue for only one rate increase this year and then one, or at most two, increases in 2017, these analysts believe.
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.
Analysts also note that whether the Fed raises rates this week or not until mid-December will make little difference to the economy. With inflation still running below the Fed’s 2 percent target,
many Fed officials have said they think they have room to continue pursuing an extremely gradual approach to rate increases.
That said, the Fed’s decision at its previous meeting in September not to raise rates drew an unusually high three dissents from members of its policy committee. The three dissenters wanted to act immediately to raise rates.
A Fed decision to stay on hold this week might draw the same three dissenting votes. But some analysts say that if the Fed were to signal in this week’s statement that a rate increase is likely in December, it would lessen the number of dissenters.