Fed Holds Rates at Current Levels, Makes Few Tweaks

The Federal Open Market Committee voted to keep its benchmark interest rate unchanged as widely expected on Wednesday but did make a few tweaks to its policy statement. Ahead of the announcement, traders anticipated a hawkish tone to its statement, hinting it was preparing for a quarter-point rate hike in December.

On to the highlights:

The FOMC unanimously approved keeping the Federal Funds rate in a range of 2 percent to 2.25 percent.

On the positive side, the committee also noted that the unemployment rate “has declined” since the September meeting. Last week, if you recall, the Labor Department reported last week that the economy added 250,000 jobs in October, while the Unemployment Rate fell to 3.7 percent, the lowest level since December 1969.

On the negative side, the monetary policy statement noted that the “growth of business fixed investment has moderated from its rapid pace earlier in the year.”

The Fed offered no explanation as to why it saw investment declining. However, Fed members have been mentioning in recent speeches the impact of the tariffs on investment spending. Additionally, companies reported during third-quarter earnings season that some of their investment plans have been curtailed due to the ongoing trade dispute between the United States and China.

About the economy, the FOMC reiterated its belief that “economic activity has been rising at a strong rate.” This is the Fed’s reaction to GDP growth which has averaged 3.3 percent for the first three quarters and is expected to come in around 3 percent for the final three-month period of 2018.

Additionally, the central bank policymakers made no mention of the heightened volatility dogging the equity markets since the second week of October.

Finally, along with the decision to leave rates at current levels, the FOMC voted to maintain the rate the Fed pays on excess bank reserves at 2.2 percent. However, in December, some are predicting the Fed will approve a 20 basis point increase in the rate. The current 2.2 percent funds rate is just 5 basis points away from the upper bound of the range.

Market Reactions

Stocks fell after the Fed signaled it would stay the course on raising rates. The 2-year Treasury yield hit its highest level since 2008 after the Fed signaled no change in its rate hike plans. The U.S. Dollar held on to earlier gains against a basket of six rival currencies. Dollar-denominated gold fell to a one-week low, as the greenback pushed higher and appetite for riskier assets rose.