Federal Reserve Update – No Rate Increase YetBy Jeffrey A. Messer, Director of Umbaugh Cash Advisory Services, LLC, October 19, 2015
The Federal Reserve decided at its September meeting to once again to leave the fed funds rate at its current 0.00% - 0.25% target range.
We’ve talked about this before, but it bears repeating that the Fed has two primary mandates – maximum employment and stable prices. With the unemployment rate hovering around 5.0% and an inflation rate in the 1.0 to 2.0% range, the U.S. economy has essentially met the Fed’s targets.
With the economy doing so well, why is the Fed leaving interest rates at emergency levels? We are not in a crisis anymore, so it seems logical that the Fed would begin to “normalize” interest rates. In fact, from 1990 to just before the crisis in 2008, the fed funds rate averaged around 4.00%.
Federal Reserve Bank of Atlanta president Dennis Lockhart said the decision not to raise rates was a close call. The Fed’s press release stated 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.” So, while the U.S. seems to be doing well, China and Europe continue to struggle.
After each meeting, the Fed publishes its projections for the federal funds rate. The current forecast for the appropriate target for the federal funds is a range of 1.1% - 2.1% for 2016, 2.1% - 3.4% in 2017 and 3.0% - 3.6% in 2018. We shall see.
In addition to the U.S., interest rates are extremely low in Europe and Japan with little or no inflation and in some cases high unemployment. It’s hard to make a case to increase rates in any of these economies.
What is the new “normal” for fed funds? Short of run-away inflation, it looks like we may experience extremely low interest rates for years to come.
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