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Federal Reserve hold interest rates

November 10, 2018 | Expert Insights

The US Federal Reserve held interest rates steady on Thursday (Nov 8) and said ongoing strong job gains and household spending had kept the economy on track.

Background

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913. The main goal behind establishing the body was to create a central control of the monetary system that will prevent financial crises. In the event of a financial downturn, the Federal Reserve steps in to provide key aid.

Over the years, the Federal Reserve a played a key role in saving the American economy (and in turn the global economy) from imploding. Its roles and responsibilities were expanded after the Great Depression, that caused a global meltdown. The timing of the Great Depression varied across nations; in most countries, it started in 1929 and lasted until 1941. It resulted in international trade being reduced by 50% and unemployment rose.

A rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. Whenever the Federal Reserve increases the interest rates, the prime rate increases, and the credit card rates also increases among others. A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt.

Analysis

The US Federal Reserve held interest rates steady on Thursday (Nov 8) and said ongoing strong job gains and household spending had kept the economy on track. "The labour market has continued to strengthen and... economic activity has been rising at a strong rate," the Fed said in its latest policy statement, leaving intact its plans to continue raising rates gradually.

The statement reflected little change in the US central bank's outlook for the economy since the last policy meeting in September, with inflation remaining near its 2 per cent target, unemployment falling and risks to the economic outlook appearing to be "roughly balanced." Policymakers, however, noted that business investment had "moderated from its rapid pace earlier in the year," a possible drag on future economic growth.

Financial markets had expected the Fed to hold its benchmark overnight lending rate steady in the current range of 2 per cent to 2.25 per cent. The dollar weakened modestly against the euro and Japanese yen, but other financial markets were little changed from levels ahead of the Fed's statement.

Stocks remained mixed after Wednesday's substantial rally following the results of the US midterm elections, in which Democrats captured control of the US House of Representatives but Republicans held the Senate. US Treasury yields largely remained near their highs on the day. The Fed has raised rates three times this year and is widely expected to do so again in December.

Data released in late October showed the US economy grew at a 3.5 per cent annual rate in the third quarter, well above the roughly 2 per cent annual growth pace the Fed and many economists regard as the underlying trend. However, Fed policymakers also have begun debating whether the economy has reached a plateau as the stimulus from the Trump administration's US$1.5 trillion (S$2 trillion) tax cut package and increased federal spending begin to fade.

The Fed's policy statement did not explicitly take stock of recent volatility in US equity markets that led to a selloff in October or address the possibility of a slowdown in global growth next year.

There were no updated economic forecasts released on Thursday and Fed Chairman Jerome Powell was not scheduled to hold a news conference. The Fed's policy decision was unanimous.

Assessment

Our assessment is that the decision to not raise the interest rates was taken keeping in mind the deceleration of economic growth as a result of the ongoing trade war. Fed Chairman was keen on raising the interest rates in the last quarter based on a strong economic performance. We believe that until the trade war is resolved, the Fed will not strain the markets by increasing interest rates. We also feel that the interest rates will likely remain stagnant.