Fed Won't Raise Rates Just Yet, But Economy Is Strong: Report

Officials announced Wednesday at a meeting of the Federal Open Market Committee that the Federal Reserve will keep interest rates steady between 0.25 and 0.50 percent, while affirming a favorable outlook for the economy as a whole.

Janet Yellen, the Fed chair, indicated in a speech at the end of August that she expected to raise rates soon. Some expected that a rate hike would be announced this month, but today's meeting confirms that the reserve bank is likely to wait until December to officially change pace. In December 2015, the Fed raised the federal funds rate for the first time since the 2008 financial crisis, after leaving it near zero for years to stimulate the economy.

Why do interest rates matter?

Well, most people notice when their savings accounts have low rates, because they earn less interest on their money. But low interest rates also encourage businesses to borrow more money, which should mean they're more likely to invest in new projects and hire more people, which can lift the economy as a whole.

When making these decisions, the Fed is required to consider its dual mandate of both keeping unemployment low and maintaining price stability. Under typical conditions, keeping interest rates low can spur business growth and thus lower the unemployment rate while risking higher inflation.

However, as the Fed's statement notes, unemployment remains relatively low and inflation continues to fall under its target of 2 percent, where it has mostly remained since the Great Recession. The report cites low energy prices as the major cause of low inflation, which the Fed expects to continue in the short run; over the medium-term, officials expect inflation to reach its 2 percent target.

A strong economy and low unemployment are generally reasons to expect the Fed to raise interest rates, but low inflation is generally seen as a reason to keep rates low. Economists disagree about the best path forward under current conditions, and the Fed's actions and messages are being closely monitored.

The report cites solid employment gains, despite a steady unemployment rate, and growing household spending as positive trends in the economy, though businesses broadly still appear reluctant to make serious investments.

The FOMC's decision was affirmed by a vote of 7-3, with Yellen siding with the majority. Three members of the committee favored raising rates by 0.25 percent this month.

Photo credit: Kurtis Garbutt via Flickr