(AP) — The Federal Reserve is leaving its benchmark interest rate alone and signaling that it expects to keep low rates unchanged through next year.
The Fed’s decision follows three rate cuts earlier this year. It reflects its view that the U.S. economy has so far withstood the U.S.-China trade war and a global slump and remains generally healthy.
Its benchmark rate — which influences many consumer and business loans — will remain in a low range of 1.5% to 1.75%
Persistently low inflation with very low unemployment has led many Fed officials to conclude that rates can remain lower for much longer than they thought without spurring higher prices. Low rates help consumers and businesses afford to borrow and spend. Still, savers have struggled to find returns outside the stock market that can keep them ahead of inflation.
Chairman Jerome Powell has said that this year’s Fed rate cuts have helped lower mortgage rates and spurred growth in home purchases. Auto sales have also remained healthy as more Americans have borrowed to buy cars.
After having raised its benchmark short-term rate four times in 2018, the Fed reversed course this year and cut rates three times to a range of 1.5% to 1.75%. Powell has portrayed those cuts as mainly “insurance” against a slowdown resulting from weak global growth and President Donald Trump’s prolonged trade war with China.
Monthly job growth reached its highest point this year in November, and the unemployment rate matched a 50-year low of 3.5%. Measures of consumer confidence also remain at historically high levels.
Powell and other Fed policymakers have made clear that they are no longer worried that a healthy job market will necessarily fuel excessive inflation. Instead, they would like to see inflation reach their 2% target level after running below it for most of the past seven years. Even with unemployment at a 50-year low of 3.5%, the Fed’s preferred inflation gauge showed prices rising by just 1.3% in October compared with a year earlier.
Tame inflation and ultra-low unemployment have led Fed officials to rethink their view of the so-called “neutral rate.” This is the point at which the Fed’s key rate is believed to neither accelerate economic growth nor restrain it. The neutral rate typically shouldn’t change very often or very much. But the Fed’s policymakers estimate that the neutral rate is now 2.5%, down from 3% as recently as September 2018.
And Fed Vice Chair Richard Clarida suggested last month that full employment — the lowest rate that the Fed thinks the jobless rate can go before it starts escalating inflation — could be as low as 3.6%. A year ago, the Fed thought it was 4.4%.