Federal Reserve Leaves Rates Alone Buts Plans to Sell Off Bonds
Sep 27th, 2017 @ 12:36 PM by Amber Nelson
The U.S. central bank declined to raise its target interest rate last week, but it will start selling off its massive portfolio of bonds in October.
The Federal Reserve left its federal funds rate – which affects everything from mortgage rates to car loan rates to food prices – in the range of 1 percent to 1.25 percent. After increasing it three times since last December, the Fed felt that the economy needed a little extra support in the short run, especially in the wake hurricanes Harvey, Irma, and Maria.
While the effects of the storms on the economy are not likely to last beyond a few months “inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term,” the Fed press release said. Raising rates at this time might put too much pressure on expanding-but-not-yet-flourishing economy. Inflation is currently only about 1.6 percent.
The reason for the low inflation rate remains elusive to the Fedreal Reserve. “This year’s inflation shortfall is more of a mystery,” Yellen told reporters at the press conference. “I will not say that the committee clearly understands what the causes are.”
Although interest rates did not change, the Fed will start off-loading $10 billion of the $4.5 trillion in Treasury bonds and mortgage-backed securities it has amassed since 2008 when it was desperate to prop up the recessing economy. By buying up those investments, the Fed reduced borrowing costs for all businesses, hoping to stimulate key players into action. That was after it had already reduced the federal funds rate to zero.
At least one more rate increase this year may be warranted before the end of the year though as the Fed increased its 2017 GDP forecast to 2.4 percent from 2.2. percent. “Job gains have remained solid in recent months, and the unemployment rate has stayed low,” the Fed said in a statement.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.