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Fed Holds Off on Rate Hike Until Economy Improves

FedThe Federal Open Market Committee (FOMC) once again stood still on raising the federal funds rate this month due to disappointing economic indicators, leaving the looming question of when the Fed will make its move.

The Fed determined that since the last meeting in April, the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up, according to a release Wednesday.

Job gains diminished, even though the unemployment rate fell. In addition, household spending increased, while the housing sector as a whole "has continued to improve." The Committee also noted that inflation is still running below the 2 percent goal.

"Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation," a release from the meeting said.

As for future rate increases, the Fed stated, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation."

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data," the Fed continued.

National Association of Federal Credit Unions (NAFCU) Chief Economist Curt Long said, "The decision to leave rates the same was widely expected, especially after the disappointing job numbers in May. July is still a possibility if employment data is better this month, but it is more likely the committee will now wait until the third quarter or later.”

Prior to the little-improved gross domestic product (GDP) report from the Bureau of Economic Analysis and the lower-than-expected Employment Summary from the Bureau of Labor Statistics, many in the industry, including Fed Chair Janet Yellen, believed that it "likely would be appropriate for the Committee to increase the target range for the federal funds rate in June," minutes from the last meeting said.

The GDP bounced back slightly in the second estimate for Q1. The Bureau of Economic Analysis reported GDP growth at annual rate of 0.8 percent for the second estimate, still down from Q4’s GDP growth rate of 1.4 percent.

Long stated in response to this data, “While first-quarter GDP remained low despite the upward revision, there are a number of reasons to anticipate a rebound in the second quarter. Incoming data has been noticeably stronger, the drags from low oil prices and a strong dollar were less than previously estimated, and there is still a possibility that the government’s seasonal adjustment continues to underestimate GDP in the first quarter while boosting it in subsequent quarters. Overall, this is another in a string of positive data releases which will provide plenty of ammunition for the Fed to raise rates no later than July.”

The most recent employment data from the Bureau of Labor Statistics showed that the labor force participation rate fell by 20 basis points down to 62.6 percent and has fallen by 40 basis points over April and May to offset first-quarter gains, after hitting its lowest level since the 1970s in 2015. Not only did job gains total only 38,000 for May, but March and April totals were downwardly revised by a combined 59,000 jobs down to 186,000 and 123,000, respectively, making the average monthly job gain over the three-month period from March to May a less-than-stellar 116,000.

“The employment data issued today is the weakest monthly job creation report since September 2010. This greatly diminishes the likelihood of the Federal Reserve raising rates in June, which would be a net positive for housing demand this spring,” Realtor.com Chief Economist Jonathan Smoke said. “But diminishing job growth also raises concern about longer-term demand for housing later this year and into 2017. Although some of this decline could be temporary, the deceleration we are seeing in job creation will eventually impact the pace of household formation. Fewer households being formed will impact the demand for homes, both to rent and to buy."

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