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Why Did the Fed Decide Not to Raise Interest Rates?

While the Fed admitted that employment and inflation levels were approaching its goals, it worried that slower international economic activity would depress U.S. growth rates

Robert Johnson, CFA 30 September, 2015 | 10:19
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The Fed opted to kick the can down the road a bit, and decided not to raise rates at its September meeting. That was what about 75% of market participants had anticipated. While the Fed admitted that employment and inflation levels were approaching its goals, it worried that slower international economic activity would potentially depress U.S. growth rates and employment while a strong dollar was likely to keep inflation lower for longer.

It also had some concerns that the unemployment rate might not be the optimal metric for the labor market given a lower labor market participation rate and a continued high rate of part-time employees who want to be working full time. Given the uncertainty, it didn't feel an imminent need to raise rates. On the other hand, 13 of 17 governors thought that rates would be raised in 2015, hardly reassuring for those who want low rates indefinitely.

Plus, their longer-range forecasts show rate increases over the next year, albeit at a pace that is well below normal cyclical patterns. Current Fed governor forecasts have the Fed Funds moving up from 0.12% currently to just 1.4% by the end of 2016, slowly working its way to 3.4% by the end of 2018. In total that is just barely over a 3% increase over more than three years. The relatively slow pace and small size of the total increase are all well below history.

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About Author

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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