FOMC leaves federal fund rate unchanged as hurricanes disrupt economy

The Federal Open Market Committee decided to maintain the existing federal funds rate of 1% to 1.25% and believes the monetary policy is accommodative and supports improvements in the labor market and a return to 2% inflation, according to a Wednesday (Nov. 1) statement from the committee. The labor market has “continued to strengthen” and “economic activity has been rising at a solid rate despite hurricane-related disruptions” since the committee met in September.

The federal funds rate, or the rate banks charge each other for overnight loans, is used to determine the interest rate one would receive on a loan. In June, the Fed increased the rate to the range of 1% to 1.25%.

The hurricanes caused payroll employment to decrease, but the unemployment rate fell. Household spending increased “at a moderate rate, and growth in business fixed investment has picked up in recent quarters,” according to the FOMC. After the hurricanes, gasoline prices rose and boosted overall inflation in September, but inflation for items, excluding food and energy, was soft. Inflation has fallen this year and is below 2%. “Market-based measures of inflation compensation remain low,” and expectations of longer-term inflation have not changed much.

Hurricane-related disruptions and rebuilding are expected to continue to impact the economy, employment and inflation in the near term. But over the medium term, the storms are not expected to “alter the course of the national economy,” according to the FOMC. Gradual adjustments in monetary policy will allow the economy to expand “at a moderate pace, and labor market conditions will strengthen somewhat further.” Inflation is expected to remain under 2% in the near term, but should reach the committee’s goal of 2% in the medium term. Risks to the economic outlook in the near term “appear roughly balanced, but the committee is monitoring inflation developments closely.”

To reach its goals of maximum employment and 2% inflation, the committee will assess existing and expected economic conditions. The assessment includes “measures of labor market conditions, indicators of inflation pressures and inflations expectations, and readings on financial and international developments,” according to the FOMC. Economic conditions are expected to “evolve in a manner that will warrant gradual increases in the federal funds rate.” It is expected to “remain, for some time, below levels that are expected to prevail in the longer run.” But how the rate is changed “will depend on the economic outlook as informed by incoming data.”

The next FOMC meeting is set for Dec. 12-13.