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Fed Up Yet?

Fed Up Yet?

The answer is no. The Federal Reserve Board’s Open Market Committee (the “Fed”) decided at its June meeting this week not to raise interest rates, instead keeping them near zero where they have been since 2008. The Fed, which has not increased rates in nine years, has stated repeatedly that any decision to raise its federal funds rate is tied to two benchmarks. The first, which has already been achieved, is an unemployment rate of between 5.2% and 5.6%. The second is an annual core CPI of 2.0%. Low growth in wages has been believed to be responsible for inflation staying below 2%, but the Fed had felt that the low unemployment would eventually drive up wages, causing consumers to spend more and eventually driving up the core CPI. This will lead the Fed to gradually raise interest rates.

For now, the Fed feels growth in the national economy has fallen below a 2% annual rate; just six months earlier the Fed had predicted this rate by now would be as high as 3%, more in line with normal economic conditions. The Fed’s statement following its meeting noted that energy prices have stabilized rather than continuing a downward trend which tended to keep inflation low.

When the Fed will begin raising rates is anybody’s guess. Compared to March, more of the Fed’s 17 policymakers now believe there will be either one or no rate increases this year, rather than two increases. The actual text of the Fed’s policy statement contains language which could support just about anyone’s prediction of when the rates will begin to go up. A low fed funds rate, although not conducive to higher rates of return on fixed-rate investments like certificates of deposit, will continue to benefit borrowers, especially those with good credit, by keeping borrowing costs lower.

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