Health Care

Federal Reserve holds key interest rate steady — but its patience is wearing thin

The U.S. central bank has decided to keep its benchmark interest rate right where it is, in a range between 2.25 and 2.5 per cent.

The Federal Reserve made the announcement Wednesday following a two-day policy meeting.

Economists weren’t expecting any change, but there was some thought that the bank could move to cut rates as it has faced pressure to do so.

The central bank raises its rate when it wants to cool down an overheated economy. It cuts when it wants to stimulate the economy. The Federal Reserve’s rate filters down to ordinary people by impacting the interest rates they get on things like mortgages, and savings accounts from their retail banks.

Analysts who monitor the central bank took note of the removal of one word from the bank’s statement: “patient.”

When it last spoke in May, the central bank said it would “be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” and analysts focused on that desire for patience.

Wednesday’s statement removed that patience and seemed to suggest the bank was ready to act if necessary. 

“The [bank] will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the bank said. 

That implies a rate cut is on the table, something the U.S. central bank hasn’t done in more than a decade, dating back to 2008. Trading in investments that track and predict the bank’s rate imply there is now a 100 per cent chance of a rate cut next month. Prior to Wednesday’s Fed statement, those odds were set at just over 80 per cent, before the statement offered a hint of which way the bank was leaning.

The Federal Reserve also indicated it expects the inflation rate to drop below its targeted two per cent level by the end of the year. 

Stocks rose on Wall Street Wednesday afternoon and bond yields fell even lower after traders learned the Fed is prepared to start cutting interest rates if needed to protect the economy.

Major market indexes had been wavering between small gains and losses as traders waited for the Fed’s policy announcement to be released at 2 p.m. ET.

Shortly afterward, the SP 500 index was up 0.3 per cent and the Dow Jones Industrial Average added 63 points, or 0.3 per cent, to 26,528.

The bond market had a more pronounced reaction to the Fed’s statement. The yield on the 10-year Treasury note touched its lowest level since September 2017. It fell to 2.04 per cent from 2.06 per cent late Tuesday.

Article source: https://www.cbc.ca/news/business/federal-reserve-interest-rate-1.5181652?cmp=rss

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