Fed Holds Rate Steady on Foreign Concerns

The Federal Reserve decided to again leave it target interest rate unchanged today, citing the volatility in the global markets as its motive for inaction.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,” the Federal Open Market Committee wrote in its statement . The federal funds rate has been unchanged since December 2008, during the height of the Great Recession.

Although the Fed has been expecting to raise the rate sometime this year, financial chaos abroad had the group rethinking that aim. “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the statement said. In a press conference after the Fed’s meeting today, Fed Chairwoman Janet Yellen named China specifically as a major reason for concern.

The Fed did note that the U.S. economy has been “expanding at a moderate pace” with the labor market improving and household spending increasing. Yet inflation remained below the 2 percent mark to which the Fed aspires, being held back by low energy prices and non-energy imports.

The final sentence in the Fed statement definitely gave markets reason to wonder if the rate will increase at all before 2016. “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The result of the announcement was an initial jump in stocks, followed by a larger decline. Treasury bond yields increased after the decision, a motion which typically send mortgage interest rates lower. Because of the language of today’s statement, mortgage rate may be able to stay near all-time lows for the rest of the year.

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