Saying that inflation isn't growing as desired and that the global markets are too unstable, the Federal Open Market Committee (FOMC) on Thursday announced that it would not be raising short-term interest rates any time soon.
The committee's decision comes after months of speculation on the part of analysts and the media that a rate hike was imminent and would likely be announced in September. The mortgage banking industry, in particular, was anxious about the prospect of a rate hike, as it would have had a significant impact on mortgage application and origination volumes.
As of Friday, some analysts, citing the prospect of longer-term economic stagnation, were speculating that it could be three years or more before the Fed raises short-term interest rates.
Although the FOMC, as per its statement, recognizes that the housing market is improving, that household spending is up and that the ‘labor market continued to improve, with solid job gains and declining unemployment,’ it nonetheless says underutilization of labor resources, soft exports and slow growth in inflation are reasons to keep short-term rates at the current 0% to 0.25%.
‘The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad,’ the FOMC says in the statement. ‘Inflation is anticipated to remain near its recent low level in the near term, but the committee expects inflation to rise gradually toward two percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.’
The committee has provided no estimate as to when it might consider raising rates, saying it will only do so once it has seen ‘some further improvement in the labor market and is reasonably confident that inflation will move back to its two percent objective over the medium term.’
To help maintain liquidity in the mortgage market, the committee will continue to reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities, as well as rolling over maturing Treasury securities at auction.
‘An argument can be made for a rise in interest rates at this time,’ Fed Chair Janet Yellen said at a news conference on Thursday.
However, she added that the Fed wants to take more time to evaluate how market turbulence overseas might affect the U.S.
‘The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets,’ Yellen said during the press conference.
At the same time, she said that the Fed ‘[does not] want to respond to market turbulence.’
For more, check out this report in the Wall Street Journal.