Fed says it will be patient on rates

The Federal Reserve opted not to raise interest rates during its policy meeting this week and pledged that future moves will be done patiently and with an eye toward how economic conditions unfold.

In a statement Wednesday, the central bank voted unanimously to hold its policy rate in a range between 2.25 percent and 2.5 percent.

The decision came along with a separate statement on the Fed’s balance sheet indicating that policymakers will consider adjusting the reduction of the central bank’s bond portfolio if conditions warrant. Officials in that statement also said they expect to operate with “an ample supply” of bank reserves, an indication that the balance sheet will remain sizable once its reduction is complete.

In a move that represented a divergence from policy of the past several years, the Fed dropped language that more rate hikes likely would be warranted – “further gradual increases,” as stated after the December meeting – and said it was adopting a more cautious approach.

Looking ahead, the Fed theoretically could still raise interest rates this year, meaning that January’s announcement could just be an indication it’s taking a wait-and-see approach based on the state of the economy. Back in December, the Fed said it expected two increase in 2019. However, the FOMC dropped that language from their January announcement.

Ahead of the Fed’s decision, the 30-year fixed rate mortgage average was 4.45%, having stayed at that level for three straight weeks. And the Fed’s choice to hold steady on interest rates could keep mortgage rates there.

But that’s not guaranteed. Mortgage rates generally track the 10-year U.S. Treasury note and not the federal funds rate, which is a short-term rate at which banks lend money to each other. Because mortgage rates are based on long-term interest rates, the major concerns that impact their fluctuations are related to the overall health of the global economy.

To the extent that the Fed’s policy will have ripple effects, mortgage rates could be affected — as is likely to be the case if the monetary policy body ends up raising rates this year. However, concerns regarding trade relations between the U.S. and China could prove just as influential.

A rise in interest rates is good news for savers because it typically leads to a corresponding increase on the yields offer for savings accounts and products such as certificates of deposit.

Savers need not despair that the Fed didn’t raise interest rates this month. That’s because competition for consumers’ deposits has been heating up for some time now.

“Even in the absence of a Fed hike, there’s still a lot of competition among online banks to attract consumer deposits,” McBride said. “If the Fed is on the sidelines for an extended period, that will rob some of the momentum and yields might slack out, but will resume rising when it’s evident the Fed is going to raise rates again.”

Generally speaking, the Federal Reserve raises (or lowers) interest rates in response to inflation. When the Fed is concerned about prices rising too fast, it will raise rates. And when inflation is anemic, it will lower them to prompt more borrowing activity.

In recent months, inflation has hovered around 2%, which is the pace that the Fed is typically looking for. This largely explains why Fed officials have suggested they won’t hurry to hike rates this year and will take a more patient approach.

On the ground, though, the inflation situation may feel very different. Inflation did hit a six-year high back in July, and wages have generally not kept pace with the rising cost of living many Americans face. These are factors that aren’t necessarily reflected in the higher-level figures the Fed studies, McBride said. “Everybody’s individual rate of inflation is likely to be different from the headline or core numbers the Fed is looking at,” he said.

Therefore, if prices for groceries or other consumer goods have been increasing where you live, the Fed’s decision may not make a huge difference.