Federal Reserve Keeps Rates on Hold

October 29, 2015Monetary Policyby EW News Desk Team

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The Federal Reserve is leaving low interest rates in place as it sees weak job growth and moderate economic improvement throughout America.

The decision by the Federal Open Market Committee comes a month after a previous decision to keep interest rates at historic lows despite broad expectations of a September interest rate hike. Expectations for a rate hike in October remained minimal, but the Fed’s comments on Wednesday afternoon encouraged a number of analysts and economists to predict a jump in rates in December.

The Federal funds rate futures market, which attempts to predict the timing of interest rate decisions, indicates increased expectations for a rate hike in December, with a 43% probability of rates increasing by the end of the year.

The FOMC has remained tight lipped about its plans, noting that it will continue to focus on employment and inflation rates and gauge whether those continue to see improvements. "Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. 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,” said the Federal Reserve in a statement.

At debate remains the FOMC’s definition of “maximum employment,” particularly as headline unemployment rates have fallen steeply over the last two years. At 5.1% in September, the current unemployment rate has nearly halved from the 10% spike in October 2009, and is nearly at pre-recessionary rates seen in 2005 and 2006.

Several critics believe this unemployment definition is faulty, however, and Federal Reserve Chairwoman Janet Yellen has repeatedly insisted that the Fed will take a broader data-based view in assessing whether the U.S. has reached full employment. While unemployment rates have continued to fall, so too has the labor force participation rate. This is a measurement of how many Americans are active in the workforce, and this has trended steeply downwards from 66% in 2008 to 62.4% in 2015.

Economists debate whether discouraged workers or an aging population are the primary contributors to this trend, but both sides tend to agree that a lower participation rate is deflationary to both wages and price growth, and may in part explain why prices have begun falling on a year-over-year basis.

Although some argue cheap oil is a primary cause of this trend, others argue that this fall in prices could produce a liquidity trap that in turn stunts U.S. economic activity and growth, thereby requiring stimulative action from the Federal Reserve.

U.S. equities turned sharply higher on the news that the Federal Reserve would not raise rates, and the 10-year Treasury yield rose three basis points, but remains near its lowest point at 2.1%.