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Fed Says Economy Still Not Ready for Rate Hike

The Federal Reserve's open market committee says it wants to see further improvement in the labor markets and inflation heading back to near 2%.
Matthew HellerSeptember 17, 2015
Fed Says Economy Still Not Ready for Rate Hike

The U.S. Federal Reserve decided on Thursday to further delay an interest-rate hike, indicating it still does not believe the economy has recovered enough from the Great Recession to begin “normalizing financial policy.”

The financial markets had been abuzz at the possibility that the Fed would announce a rate increase after a two-day meeting of its policy-making committee that began Wednesday. It has kept rates at near zero for eight years to boost the faltering economy.

But the committee voted 9-1 to stay put — for the time being, at least.

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“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the Fed said in a news release.

The central bank noted that “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.” At a news conference, Fed Chair Janet Yellen said China’s economic troubles and slow inflation played into the decision to delay raising rates.

Earlier this year, the Fed appeared to be moving toward a September rate hike but as Fortune reports, “a slowdown in job growth and remaining slack in the labor market means that the Fed doesn’t need to worry about inflation — the main risk of low interest rates — quite yet.”

“Metrics from wages to capacity utilization show a U.S. economy that is far from overheating,” economist Katrina Lamb of MV Financial told The Wall Street Journal. “Given this lack of urgency, the Committee’s decision to keep its powder dry for another day is logical and prudent.”

Said Tim Barron, chief investment officer at Segal Rogerscasey, “The Fed’s decision projects a view that the economy remains in a tenuous position and it continues to be concerned with the nature of recovery from the global financial crisis. This is good news for borrowers as rates continue to be low for longer, and may mean the dollar doesn’t strengthen in the near term. The bad news is that the Fed believes the economy is too weak to withstand even a modest increase without tremors in markets or growth trajectory.

The Fed still plans to raise rates this year, according to new economic projections it also published on Thursday. But it also cautioned 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.”

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