Tuesday, August 2, 2016

Federal Reserve holds rates steady as national economy fails to impress

Last week, the Fed's Federal Open Market Committee announced it would leave the target Federal Funds Rate unchanged.

During 2014 and 2015, the Fed repeatedly hinted that it would raise rates "soon" and that it would return the target rate to more normal levels.

Throughout most of 2015, the Fed repeatedly put off increasing the target rate, and then, feeling pressured to actually take action after many months of claiming it would take action, the Fed raised the target rate from 0.25% to 0.5% in December of 2015.

Since then, though, after months of claiming that the economy was improving, the Fed has refused to raise the target rate any further. The Fed was apparently spooked by what many would consider to be a fragile economy, although FOMC statements continue to contain phrases like "growing," "moderate" "gains" and other language that would lead one to believe that the economy is stable and strong.

The reality, of course, is something different which is why the Fed kept the target rate at 0.25% for seven years, and why is refuses to move above 0.5% percent.

And lest we forget just how low 0.5% is, we should remember that as recently as 2007, the target rate was above 5%.

Meanwhile, Bloomberg asks the obvious question: Has the Fed become even more dovish?" 

The answer is yes, for two reasons. First, there is fear that there is a slowdown coming. But secondly, and more importantly, the Fed is extremely unlikely to raise the target rate right before a presidential election. 

For a longer historical view of the target rate, let's look at rates since 1992: 

Note that the seven-year stretch at 0.25% was unprecedented, and the current rate at 0.5% remains below anything seen over the past three decades.