Federal Reserve stands pat on interest rates

The Federal Reserve has decided to keep its benchmark interest rate right where it is.
Federal Reserve Chairman Janet Yellen elected to not change interest rates at the central bank's latest policy meeting on Wednesday. (Michael Dwyer/Associated Press)

The Federal Reserve decided on Wednesday to keep its benchmark interest rate right where it has been for the last six years.

The U.S. central bank decided to keep its federal funds rate in a range of between zero and 0.25 per cent at its latest policy meeting on Wednesday.

That decision was in line with what economists had been expecting, but a small minority of watchers thought it was possible that America's central bank might slightly hike lending rates at either this meeting or the next one in December.

The bank did leave the door open a crack to that possibility with one line in its always obtuse policy statement.

"In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress … toward its objectives of maximum employment and 2 per cent inflation," the Fed said in its statement.

'Next meeting' will be key

The presence of those two little words — "next meeting" — were uncharacteristically specific coming from the central bank, which normally gives itself a lot of leeway in its language to hike or lower rates as it sees fit, whenever that may be.

It's the first time the Fed has used the words "next meeting" in its policy statement since 2008. That's the same year the Fed cut its benchmark interest rate to its current level in an attempt to encourage borrowing and spending to boost a weak economy

The bank has been signalling its intention for a while to hike its benchmark interest rate at some point this year, but with time running out on the calendar and the economy showing signs of weakness, many watchers have predicted the bank may have to hold off until 2016 or beyond.

That's certainly how U.S. stock market investors reacted, as the Dow Jones Industrial Average and S&P 500 had each been higher on the day and then sank like a stone after the statement came out. Investors don't like the threat of rate hikes, and tend to move out of stocks and into other investments when they happen.

Ian Shepherdson, chief economist in Pantheon Macroeconomics, expects a December rate hike if the jobs reports for October and November show the labor market is getting stronger.

"Some combination of payrolls, unemployment and wages signaling continued improvement will be enough," he wrote in a note to clients.

Others are less convinced that a rate hike is a done deal. "The main purpose of today's statement is to keep December in play but there is nothing in it that pre-commits the Fed," Scotiabank's economics team said in a note to clients.

With files from The Associated Press


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