Fed holds fire on rates, avoids stock market shock

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The Fed held its key interest rate steady Wednesday at 0.4% It said the case for a hike “has strengthened.”
Most officials expect an increase later in 2016 Fed policymakers last raised the rate in December Before that, it had been 9 years since the last rate hike
WIBBITZ

In the end, the Federal Reserve figured it wasn’t worth shocking and blindsiding unprepared financial markets with an interest rate hike. Now the U.S. central bank, which held rates steady Wednesday, is likely to ramp up its messaging machine to make sure investors are ready for a possible hike later this year, perhaps at the Fed’s meeting in December.

Wall Street cheered the decision not to raise short-term borrowing costs, with the Dow Jones industrial average jumping more than 160 points and the Nasdaq composite notching a fresh record high. The Fed’s vote all but assures that there will be one rate hike at most in 2016. It was the sixth straight meeting this year where the Fed opted to keep rates at their current target of 0.25% to 0.5%.

There simply wasn’t any benefit for the Fed to surprise markets with a rate hike, especially when so few Wall Street players expected it to pull the trigger — and the Fed did very little to clearly signal that an increase was imminent, says Krishna Memani, chief investment officer at OppenheimerFunds.

“There’s no shock and awe in current Fed policymaking,” Memani told USA TODAY. “Surprising the market with a quarter-point increase (wouldn’t have done) anything for the Fed. It doesn’t make sense for them to take that level of risk.”

Fed Chair Janet Yellen hinted as much in her prepared remarks following the release of the Fed policy statement and before her question-and-answer session began with reporters, when she acknowledged the Fed opted for a “cautious approach” to raising rates.

In the Fed statement, the central bank said that even though the case for a rate hike has “strengthened,” policymakers “decided, for the time being, to wait for further evidence of continued progress toward its objectives” of full employment and a rise in the rate of consumer inflation toward its 2% mandate.

The Fed, analysts say, is trying to avoid the mistake it made late last year, when it hiked rates on Dec. 16 at a time when U.S. economic data was spotty, causing the broad U.S. stock market to suffer a nearly 12% drop over a two-month span. Still, critics of the Fed’s easy-money policies warn that the longer the Fed keeps the cheap-money spigot open, the bigger the chance of bubbles forming in different corners of the financial market.

No one disputes the Fed wants to start moving rates back toward a more normal level, albeit slowly.

“If I listen to what the Fed has been saying, it seems like they want to raise rates,” says Gene Tannuzzo, a senior portfolio manager of fixed income at Columbia Threadneedle.

The question continues to be when? Wall Street is now betting that the Fed’s December meeting could be when the Fed goes. If it does hike rates after the presidential election, it would mark the first rate increase this year.

The reason the Fed cited for standing pat this time focused on giving the economy and employment market more time to heal and improve, which follows earlier Fed excuses, such as international financial turbulence, worries of a China slowdown, caution in the aftermath of Britain’s vote to exit the European Union, a dismal May U.S. jobs report and a summer soft patch in U.S. economic data.

As expected, the Fed moved quickly Wednesday to start preparing markets for an eventual rate increase later this year.

Memani says the Fed will get its message of a coming rate hike through to the market via “repetition,” or persistent communication that emphasizes that they are getting closer and closer to its targets for unemployment and inflation. The message, Memani adds, is also likely to come from a broader slice of the Fed’s voting members.

“They will prepare the market for a coming hike,” Memani says

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