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The Fed Stands Pat

By Nick Lanyi on September 21, 2016

After months of anticipation, mixed signals and several million perceptive predictions by professional prognosticators, the Fed today announced that it will do nothing.

The Federal Open Market Committee said it would keep short-term interest rates unchanged, despite a relatively optimistic outlook on economic growth. The FOMC statement, released this afternoon, said “the case for an increase in the Federal Funds rate has strengthened” but with inflation still low, pressure on prices isn’t enough to increase rates at this point.

It seems likely that rates will rise later this year, possibly in December, but that the Fed’s longer-term outlook is for more gradual rate hikes over the next two to three years than they previously expected. The Fed downgraded its expectation for 2016 GDP growth to 1.8% and said inflation will be lower than previously expected as well.

That mixed message didn’t exactly incite a selloff or a rally – more like a collective scratching of the head. Stocks rallied on the news, but then gave up most of that gain.

It sounds like this was a pretty contentious FOMC meeting. Three members voted against the decision, which is rare: there haven’t been that many “no” votes since December 2014. For economists, that’s practically a food fight.

We can expect the quarter-point increase in December, unless economic conditions change considerably. Delaying the rate hike by three months isn’t a huge deal for the economy, but it will amp up the grumbling about the Fed’s mixed messages. Fed leaders signaled a rate hike, then backed off. They also spoke on both sides of the issue in the days ahead of the meeting.

In the long run, markets and the economy perform best when they know what to expect. While the Fed is moving cautiously, it could do a better job in the communications department.

P.S. As we await the first Clinton-Trump debate next week, our headline above reminds me of a story from the 1960 Kennedy-Nixon debates. Eager to match JFK’s call to “get America moving again,” Nixon declared, “America can’t stand pat” – which, unfortunately for him, allowed those inclined toward sardonic humor to suggest that Nixon was implying national contempt for his own wife, Patricia.

Like I said, mixed signals cause trouble.


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