With the FOMC meeting ending today, investors have been asking, "When will the Fed raise interest rates?"
It will be at least another two months before the central bank makes a move.
U.S. central bankers have decided once again to leave interest at rock-bottom levels. Word came Wednesday at the conclusion of the FOMC's two-day October meeting. The last time the U.S. Federal Reserve raised interest rates was June 2006.
Economists and investors widely expected the Fed to hold short-term interest rates near zero at this week's meeting. Now they're dissecting the policymakers' statement for answers to the question, "When will the Fed raise interest rates?"
Today, the Fed's hawkish tone suggests a December rate "liftoff" is a possibility.
Fed officials indicated in a statement today that they have become less concerned in recent weeks about volatile financial markets and uncertain economic developments overseas. They also pointed specifically to the next meeting (Dec. 15-16) for when they would be assessing whether it is time to raise rates.
However, there is still some reason to believe the Fed's pause may extend past December.
The Fed noted that net exports have been soft, the pace of job gains has slowed, and seriously dwindling labor force participation is responsible for the low 5.1% unemployment rate. The Fed also said it wants to be "reasonably confident" that low inflation will rise to its 2% target.
Importantly, the Fed did not repeat today that global risks would have a likely impact on the U.S. economy and influence U.S. policymakers. That's something the Fed said at its last meeting in September.
While the odds have increased for a December liftoff, a lot can change in two months....
More than six and a half years ago, the Fed put its benchmark interest rate near zero. Its aim was to goose the fragile U.S. economy and anemic job environment.
The central bank's ultra-loose monetary policy was widely expected to tighten in 2015 amid an improving economy, rising consumer sentiment, a stronger labor landscape, and an uptick in wages.
But a glum September employment report made it all but certain the Fed wouldn't raise rates this month. September's disappointing jobs data showed just 42,000 new jobs added, as well as downward revisions to August's tally.
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Fed officials have been keeping a close eye on jobs figures for clues about when it would be appropriate to raise interest rates.
The unemployment rate has been declining steadily. But a key reason behind the falling rate is a shrinking labor force participation rate. The participation rate plunged to 62.4% in September. That was the lowest read since October 1977. The total labor force fell to a 2015 low last month as another 350,000 people left the workforce.
Further, as the Fed mulls tightening, other major central banks are in easing mode. Last week, the People's Bank of China cut interest rates for the sixth time in less than a year. The European Central Bank hinted at additional easing measures. And further stimulus moves from the Bank of Japan are expected as early as Friday.
The Fed is now treading cautiously on raising interest rates so they don't rattle markets too much. As Money Morning Chief Investment Strategist Keith Fitz-Gerald said earlier today, whether or not the market stays above its recent support line stems from the Fed.
"Any decision to stand pat on rates gives traders confidence at a time when they desperately need an incentive to keep their money at work," Fitz-Gerald said. "Unfortunately, by implication, that same thinking means even the merest hint of a December rate hike risks more volatility and a retreat."
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