Making Sense of the Fed: Here's What Its Recent Decision Means for You

The Federal Open Market Committee voted Wednesday, Nov. 2, to maintain interest rates at between one-quarter and one-half of a percent.

What exactly does that mean?

Well, the FOMC is empowered to set the goals of the Federal Reserve, which controls monetary policy in the United States. By keeping the federal funds rate low — the rate at which banks loan money to each other — the Fed effectively lowers interest rates for the rest of the economy as well.

This means theoretically that people, especially businesses, should have an easier time getting loans at affordable interest rates. The Fed keeps rates low to encourage business investment and thus drive up national employment.

If rates stay low even as unemployment drops, inflation can spike, in which case the Fed would likely raise interest rates until inflation falls back to a reasonable level.

With it's dual mandate to keep inflation low and employment high, the Fed's task usually is seen as something of a balancing act. But with unemployment around 5 percent, and inflation below the Fed's target of 2 percent, there's been some disagreement about how the Fed should proceed.

So why did the Fed make this decision now?

According to a press release, the FOMC sees steady job gains, even though the unemployment rate is holding. Household spending has risen somewhat in recent months, indicating a stronger economy, but business investment remains stubbornly subpar.

Low business investment suggests that low interest rates haven't been doing much to spur growth in the economy. But raising interest rates could turn disappointing investment patterns even worse.

The board voted 8-2 in favor of the decision to keep rates the same.

Bankrate's Chief Financial Analyst, Greg McBride, told Patch that the Fed's decision was expected, given how close the 2016 election is.

“No surprise. The Fed punts any interest rate move until the December meeting," he said. "With the election looming and uncertainty already gripping markets, the Fed needed to hold off in case there is a Brexit-like aftermath.”

He continued: “We’re almost there. The Fed noted the case for a rate hike has ‘continued’ to strengthen and they want to see ‘some’ further evidence before hiking rates. We may well get ‘some’ additional evidence in time for the December meeting.”

McBride also noted, however, that this time there were only two votes dissenting from the decision, rather than the three that dissented from a similar previous decision. This suggests that the decision remains contentious within the Fed, though perhaps there's more agreement that big changes shouldn't be made right before an election.

Photo credit: Federal Reserve via Flickr