July 27 (UPI) — The Federal Reserve declined Wednesday to raise its benchmark interest rate amid a low inflation rate that’s lagging despite a strong job market.
Strong job growth normally drives up prices, but it is not the case now. The unemployment rate is 4.4 percent but inflation is below its targeted 2 percent.
“In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent,” the Fed said in a statement. “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”
The Fed raised interest rates twice this year in quarter-point increments in March and June but it envisions “gradual” rate increases, the Federal Open Market Committee decided after two days of meetings.
During testimony before the U.S. House on July 12, Fed Chair Janet Yellensaid the Fed plans to keep raising its benchmark interest rate and to reduce its investment holdings. She said the “economy will continue to expand at a moderate pace over the next couple of years.”
The central bank plans to start scaling back its $4.5 trillion portfolio of bonds it accumulated while trying to boost the economy after the Great Recession in 2008.
“The committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated,” the post-meeting statement said.
The committee said it is “maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.”
Fed officials don’t expect the balance sheet runoff to be disruptive.
“It’s going to be difficult to not disrupt the markets somewhat as they start to unwind the balance sheet,” JJ Kinahan, chief market strategist at TD Ameritrade, told CNBC. “However, to their credit they did support the markets for the last nine years. They’ve done a good job of being transparent. That transparency will help smooth the way as much as possible.”
Besides buying up bonds to stimulate the economy, the Fed’s benchmark interest rate was near zero until December 2015, when it began a gradual process of hikes.
“Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability,” the Fed said. “The committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.”
After the increase, the Chicago Board Options Index’s Volatility Index fell Wednesday to its lowest mark on record. At 2:01 p.m., the VIX dropped to 8.84, below the low of 8.89 on Dec. 27, 1993. The VIX then increased to around 9.32 as of 2:21 p.m.
The Dow Jones Industrial Average was up 84.77 points to 21,698.20 at 3 p.m.
