This Wednesday, the Federal Reserve announced that they will not be increasing the federal funds rate at this time. The Federal Reserve downgraded the economic growth forecast to a projected 1.8% this year.
The decision did not come without debate as three Federal Reserve officials chose to cast dissenting votes. Esther George, Loretta Mester, and Eric Rosengren all voted no on keeping the interest rates steady, instead suggesting to raise rates immediately. The hesitations seen with the Fed on raising interest rates and the dissenting votes from high level officials may add up to a loss of credibility in the future.
On the topic of wages, Ms. Yellen stated there has been “some modest pickup in wage growth”. This reflects last week’s Census Bureau report which showed U.S. Household Incomes increasing 5.2% in 2015. The productivity growth rate has been low, with the outlook remaining it will stay at a low level. However, due to the continuing rise in job-market growth, concerns with productivity may be offset.
Ms. Yellen stressed that the lack of a rate raise does not mean a lack of confidence in the economy. The Feds is hoping that keeping the rates unchanged will allow for further improvements in the labour market. She further mentioned that the committee has agreed the employment rate is almost at a sustainable rate (long run) and they are looking to raise the inflation goal to 2%.
It is possible that the Feds will decide on raising interest rates in December, however there are numerous factors in that decision and it is possible they may not raise interest rates this year at all. If however the Federal Reserve does decide to raise interest rates in December, Canadians may be affected with a stronger U.S dollar value and see the value of the Canadian dollar decrease. A lower Canadian dollar may be good news for exports, however consumers may be at a disadvantage shopping across the border. It is also unlikely for the Bank of Canada to follow the Fed’s decision as the Bank of Canada’s governor, Stephen Poloz, announced this Tuesday to expect the low interest rates in Canada to remain for a long time.