Fed Halts Interest Rate Hikes… For Now

The Federal Reserve halted its two-year string of increases in interest rates Tuesday, holding its benchmark rate steady, as many experts expected.

The U.S. central bank held off hiking rates, as it had done by 0.25 percent in each of its previous 17 meetings, as it gauges whether a slowing economy will keep inflation in check. If inflation risks persist, the Fed indicated it might resume raising rates.

The policy-setting Federal Open Market Committee, led by Fed Chairman Ben Bernanke (left), voted to keep the federal funds rate target at 5.25 percent, pausing a cycle that had taken the rate steadily higher since mid-2004, and is the primary reason Florida mortgage rates have crept up steadily in the past year.

U.S. financial markets took the Fed’s action in stride, according to the Washington Post. Overall, stock prices were modestly lower an hour after the decision was announced, while bonds remained mixed amid slight movement.

Recent economic indicators have pointed to a downshift in the economy, led by a cooling housing market, but wages and prices continue to rise and the Fed made clear its optimism about inflation was wary and conditional.

“Inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand,” the Fed said in a statement issued after the meeting.

STILL SEEING RISKS

Some inflation risks remain, the central bank added, with officials noting that further rate moves would depend on the outlook for prices and growth.

The policy makers did not signal they were backing off their campaign just yet, more that they are preserving their ammunition for later use if needed. Most industry experts were not surprised.

“They did pretty much what was expected by leaving rates unchanged, but more importantly if you look at the statement they are certainly leaving the door open to the possibility of further hikes if needed,” said economist Rick Egelton of BMO Financial group in Toronto.

The Fed reported at the meeting’s onset that growth in U.S. productivity, or hourly output per worker, slowed to a 1.1 percent annual rate in the second quarter of this year, down from 4.3 percent in the first quarter.

The key reason was a 4.2 percent jump in unit labor costs, the fastest since the end of 2004 and well above the first quarter’s 2.5 percent — a reminder of inflation’s durability despite a moderating expansion.

“I’m a bit surprised to see the Fed saying inflation was moderating while we are having signs, including today’s productivity numbers, that inflation is not decelerating,” said economist Tim Rogers of Briefing.com in Boston.

At the conclusion of its previous meeting on June 29, the Fed cited steady productivity gains as having helped curb inflation expectations. This time, there was no reference to productivity and some analysts predicted that the weakening pace was one reason the Fed will raise rates again this year.

Soaring energy costs, with oil prices topping $77 a barrel earlier this week, are causing anxiety among consumers, as are rising insurance costs for homeowners.

IS THE RATE PINCH COMING?

Fed officials have cited softening data and stressed the full impact of prior increases in interest rates had yet to be felt. They have also expressed hope that slowing growth might lower prices as a result, which has yet to be seen this year.

“A sustainable, noninflationary expansion is likely to involve a modest reduction in the growth of economic activity from the rapid pace of the past three years,” Bernanke told Congress last month.

In the second quarter, the economy grew at an annual clip of 2.5 percent, much slower than the brisk 5.6 percent pace in the first three months of the year. Last week, the government’s employment report showed only 113,000 jobs were created in July, down from 124,000 in June and below the first quarter’s monthly average 176,000.

In addition, the previously soaring housing market has lost altitude as first-time buyers face stiffer financing costs. With lessened demand comes a downturn in numerous industries, such as with home builders, who are breaking ground in fewer spots and requiring fewer workers in response to weakening sales.

How will this affect Florida home loan rates, which have declined for two straight weeks but are up more than a full percent over the past 12 months? Overall, this is good news for buyers as the Fed’s rate hikes normally correspond with increased mortgage costs. Some fluctuation is inevitable, but don’t look for rates to stray much between now and the end of the year.