Why Fed will likely leave rates alone

Daily Local News (West Chester, PA) - - BUSINESS - By Martin Crutsinger AP Eco­nom­ics Writer

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.

Pres­i­den­tial pol­i­tics

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.

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