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Why the Federal Reserve is Hesitant to Raise Interest Rates

August 1, 2016



No one was surprised. On Wednesday, Federal Reserve officials again decided to hold the federal funds rate between 0.25% and 0.50%.

The vote wasn’t close – nine-to-one to keep rates where they are. That said, the Fed did leave the window open for a rate increase when officials meet again in late September. In the statement that accompanied the latest decision to maintain the status quo, the Fed noted a “strengthened” labor market and that household spending was “growing strongly.”

We remain skeptical that a rate hike is coming. We wouldn’t call the economy a one-trick pony, but let’s be honest, housing has been performing most of the tricks. Fed officials have all but thrown in the towel on 3% annualized growth. Without the housing recovery, we can only guess what the annual growth rate would be. Housing is more interest-rate sensitive than many other sectors of the economy. Fed officials will tread carefully on raising interest rates. No one wants to stall the one engine – housing – that’s hitting on all cylinders.

With the Brexit vote digested, the US presidential candidates settled, the lack of anything of importance pending domestically or internationally, we don’t expect to see much movement in lending rates until September (when action in financial markets usually kicks into a higher gear). In other words, the lending rates we have now are likely the lending rates that will prevail for the next four or five weeks.

Then again, we do have two employment reports between now and Labor Day. These two reports, more than most other scheduled reports, have the potential to move lending rates one way or the other.

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