Fed Keeps Rate at Zero, But Warns of December Hike

The Federal Reserve’s interest rate-deciding body, the Federal Open Market Committee, chose this week to leave its target rate at or near zero percent, but promised to rethink the issue at its December meeting.

The federal funds rate – the rate at which banks charge each other for overnight trades – was left alone in the range of zero to 0.25 percent for the next six weeks. It has been at that rock bottom position since September of 2008 when the Fed attempted to prop up the failing economy with low rates and extra stimulus. Since then, the FOMC has not seen the inflation or economic stability it has hoped for in order to be able to raise rates.

The Fed statement from the October meeting said that although “economic activity has been expanding at a moderate pace…the pace of job gains has slowed and the unemployment rate held steady.” It appears that international concerns are much less of a worry and that the lack of domestic economic steam is more of a determining factor for the Committee.

With its latest decision, the Fed spelled out its intention to revisit a possible rate increase at the very soonest opportunity. “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.” The fact that the phrase “at its next meeting” was used is a sign that October’s decision was a difficult one.

If rates were to rise soon, the fear is that the still-recovering economy would be unable to handle the increased costs of higher mortgage rates and more expensive business loans. Although no one believes rates will jump quickly, even a small rise can have an immediate economic effect, a fact that has made the Fed extremely cautious for the past seven years.




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