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A cautious Fed holds key interest rate steady

Wants to see more strength in economy

A trader worked on the floor of the New York Stock Exchange as news came out that the Federal Reserve decided to not raise interest rates.
A trader worked on the floor of the New York Stock Exchange as news came out that the Federal Reserve decided to not raise interest rates.Andrew Burton/Getty Images

Seven years after the financial crisis, the Federal Reserve still is not ready to blow the all-clear whistle on the US economy and raise a key short-term interest rate, allowing borrowers to enjoy rock-bottom rates on homes, cars, and other major expenses for a bit longer.

In a 9-1 vote Thursday, Fed policy makers, raising concerns about a slowing global economy and its impact on the United States, decided to wait until the labor market further improves, worrisome low inflation rises, and the recent tumult in international markets settles before moving ahead with its first rate increase in nearly a decade. The Fed has held its benchmark federal funds rate near zero since the end of 2008.


Most Fed officials still expect the rate to rise before the end of the year, according to forecasts released by the central bank. But the timing remains unclear.

“I can’t give you a recipe of what we’re looking to see,” Fed chair Janet Yellen said at a news conference following the announcement. “But we want to see further improvement.”

The federal funds rate is the rate at which banks, credit unions, and other depository institutions lend money to each other, usually on an overnight basis. Policy makers are scheduled to meet again at the end of October.

Yields on the 10-year Treasury note, to which mortgages and other consumer loans are tied, fell after the Fed released its decision. The average rate on a 30-year, fixed mortgage was 3.9 percent this week, down from 4.2 percent a year ago, Freddie Mac, the government mortgage finance company, reported Thursday.

“Expect interest rates to remain relatively low for quite a long time,” said Aaron Jackson, a professor of economics at Bentley University in Waltham. “That’s good news for people buying houses, cars, or other big items that need to be financed.”


Interest rates are the primary tool the Fed uses to manage the economy, cutting them to spur borrowing and spending when conditions are weak and raising them when conditions improve to prevent the economy from overheating into high inflation.

Just two months ago, the Fed seemed all but certain to raise rates and begin to normalize economic policy following the extraordinary measures taken during the last recession, the worst since the Great Depression. The US expansion appeared to be picking up — the economy grew at nearly a 3.7 percent annual rate in the second quarter, up from less than 1 percent in the first — and unemployment fell to its lowest level since the early days of the downturn. It was 5.1 percent in August, down from a 2009 peak of 10 percent.

But last month, evidence of a sharply slowing Chinese economy — it’s the world’s second- largest — and continued weakness in Europe, Japan, and other countries sent global stocks tumbling. Fed officials began to worry about the impact on a still-fragile US recovery.

Earlier this month, Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said in a speech that international conditions had made policy makers more cautious.

For the first time in years, the outcome of the Fed’s policy meeting was not a foregone conclusion. US stock markets closed mixed, with the Dow average falling 65.21 points to 16,674.74 and the broader Standard & Poor’s 500 declining 5.11 points to 1,990.20. The tech heavy Nasdaq Composite gained 4.71 points to 4,893.95.


Much of the debate over the Fed’s next move centered on the strength of the labor market. Despite the decline in joblessness, many analysts argued that the official unemployment rate is masking weaker conditions. Of particular concern is the slow growth of wages, a sign that the supply of workers still outstrips the demand.

William Dickens, chairman of the economics department at Northeastern University, said he remains concerned about the millions of Americans who dropped out of the workforce during the recession who have not returned to jobs. These workers — and those taking part-time jobs because they can’t get full-time work — are not included in the official unemployment rate.

Memories of the financial crisis and subsequent economic free fall also remain fresh, inviting caution, analysts said. By the time the Fed had lowered the federal funds rate to near zero in December 2008, some 2 million American jobs had already vanished, the housing market had collapsed, and the government was rescuing major banks from insolvency.

Allen Sinai, chief global economist at Decision Economics Inc. in New York, said those days are over and the Fed needs to recognize it and begin to raise rates. One good gauge of the economy, he said, is the skyline and the construction projects underway in Boston and other cities across the country.

Yellen, at a news conference Thursday, said policy makers remain concerned about inflation that is running well below the Fed’s target of 2 percent. When inflation is too low, it raises the risk of a destructive spiral of falling prices, production cuts, and layoffs. The Great Depression is an extreme example of a deflationary economy.


Yellen said she believes the conditions leading to low inflation — falling energy prices, a stronger dollar, and heightened uncertainty in the global economy — are temporary problems. But the policy makers decided to “wait for more evidence” that they will change. “We continue to monitor inflation closely,” she said.

Megan Woolhouse
can be reached at megan.woolhouse@globe.com. Follow her on Twitter @megwoolhouse.