BUSINESS
09/17/2015 02:02 pm ET Updated Sep 24, 2015

Fed Keeps Interest Rate Steady, Giving Leeway To Job Market

The Federal Reserve announced on Thursday that it is keeping its benchmark interest rate at or near zero, maintaining a policy that is likely to allow the job market to improve further.

The Fed’s federal funds rate -- the interest rate the Fed charges for banks to lend to one another overnight -- will remain at target rate of 0.0-0.25 percent, where it has been since December 2008 at the height of the financial crisis. The Federal Open Market Committee (FOMC), the central bank body charged with adjusting key rates, will have its next chance to adjust the influential interest rate when it meets again on Oct. 27 and 28.

By leaving the key interest rate untouched, the Fed is deliberately maintaining economic demand by preserving the current low cost of credit for consumers and businesses. If the Fed had raised rates, it could lower demand for goods and services, which in turn would reduce demand for workers and slow job growth. Fewer available jobs means less competition for workers, limiting wage growth.

The FOMC did not base its decision primarily on concerns about the health of the job market, however.

Instead, it was clear from the FOMC statement and Fed Chair Janet Yellen's subsequent press conference that the Fed's primary concern is lower-than-expected inflation as a result of the drop in oil prices and recent volatility in world markets, rather than worries about the job market. 

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the FOMC said.

Speaking at a press conference in Washington after the announcement, Yellen said the economic performance of China and other emerging market nations "bears close watching." Fears about the effects of a weakening Chinese economy on U.S. companies were a major factor in recent stock market declines. 

Yellen also cited the appreciation of the dollar against other currencies as a cause for lower-than-desirable inflation in the short-term. 

Even before the swings in the stock market in August, inflation had been way under the Fed’s 2 percent target. As of July, the Fed’s preferred inflation measure showed prices, excluding energy and food, had risen 1.2 percent in the previous 12 months. But Fed officials aim to pre-empt 2-percent inflation so that the central bank does not have to ratchet up rates too rapidly when inflation becomes an actual concern.

"I don't think it is good policy to then slam on the brakes" by raising rates dramatically, Yellen said, since that risks harming the economy.

Yellen said that the majority of FOMC members continue to believe that the factors depressing inflation will recede enough in the coming months to merit a rate hike before the end of 2015. And the Fed is confident in the health of the job market overall.

“The labor market continued to improve, with solid job gains and declining unemployment,” the FOMC statement said. But Yellen also noted that more jobs would "serve" the Fed's inflation goal by boosting prices.

The Fed chair added that in her view, the high rates of involuntary part-time employment and the number of people who have given up looking for work show that "the official unemployment rate understates the degree of slack" in the job market -- an economic term meaning that there are still too few available jobs for job seekers. 

The decision to postpone a rate hike was not unexpected. Some Fed officials have been indicating for weeks that fears about China and other emerging markets that spurred August’s stock market losses were giving them pause about a September rate hike. William Dudley, president of the Federal Reserve Bank of New York, expressed those concerns in remarks he made on Aug. 26, calling a September rate hike “less compelling” than it had been in the weeks prior.

Diane Swonk of Mesirow Financial told HuffPost last month that she predicted that the Fed would wait until December at the earliest to monitor the economic performance of China and other emerging market nations. 

Swonk stood by her prediction on Thursday. “You do want market calm,” Swonk said. “We could easily have that by December,” but it may have to wait even later.

The news will likely reassure anxious investors and prompt stock prices to rise. It guarantees another month without more expensive credit and the dampening effect it would have on trading, however minimal. 

But no one was happier with the Fed's decision than the mostly liberal economists and activists who have been opposed to an interest rate hike long before recent stock market volatility. 

"We hope [Fed] officials continue their pragmatic, data-based approach and allow unemployment to keep moving lower, and only tighten after there is a significant and durable increase in inflation,” said Josh Bivens, research and policy director for the left-leaning Economic Policy Institute, in a statement.

Bivens and others want the Fed to wait until the economy is producing enough jobs to generate wage growth of at least 3.5 percent.

Wages before inflation have gone up 2.2 percent in the past 12 months, despite the relatively low official unemployment rate of 5.1 percent. The official jobless figure does not account those who've given up looking or are involuntarily working part-time, which many economists believe explains why wage growth remains weak. When there are still more job-seeking workers than available jobs, there is less pressure on employers to compete for workers by raising wages.  

Rep. John Conyers (D-Mich.) accompanied by demonstrators with the umbrella group, Fed Up, speaks outside of the Federal Reser
ASSOCIATED PRESS
Rep. John Conyers (D-Mich.) accompanied by demonstrators with the umbrella group, Fed Up, speaks outside of the Federal Reserve in Washington, Thursday, prior to the Federal Reserve's decision on interest rates.

“This is a victory for the working families who stepped up with innovative organizing to send the Fed a clear message: Our voices belong in the debate about our economy,” said Ady Barkan, director of the Fed Up campaign, a coalition of progressive groups, in a statement. “With the recovery still far too weak in too many communities, it would have been economically devastating – and immoral – to slow the economy.”  Prior to Thursday's announcement, Fed Up joined with Rep. John Conyers (D-Mich.), Bivens and several dozen activists from across the country in a demonstration against the rate hike outside the downtown Washington offices where Yellen later held her press conference.

Yellen said at the press conference that she welcomed the demonstrators.

"We value hearing the opinions of many different groups and individuals with different perspectives," Yellen said. "But at the end of the day it is the committee's job to come together" to decide appropriate monetary policy.

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