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The Fed puts rates on ice

After raising interest rates in December for the first time since the financial crisis and Great Recession, the Federal Reserve has gone into a January freeze. The central bank on Wednesday announced no change in interest rates, meaning the target for the Fed’s benchmark federal funds rate will remain between 0.25% and 0.50%, the range set last month.

For consumers, the outcome of this week’s meeting means more of the same. Savers will continue to suffer low interest rates on savings while debtors continue to enjoy extremely low borrowing costs.

The monetary policy statement released after the meeting offered some balm for worried investors, as the central bank vowed again to move gradually and to act only on incoming data. Plus, the Fed offered the reminder that monetary policy is still extremely accommodative, or easy.

The world economy is shaky

Fed watchers hadn’t expected another rate hike this month. In fact, there are growing doubts about whether the Fed will move at the next meeting in March. The world economy looks a bit less healthy than it did in December.

The central bank acknowledged the global tumult but doesn’t seem ready to say what the impact could be in the U.S. “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” the statement released after this week’s meeting said.

Just last week, the International Monetary Fund revised downward its outlook for global growth, forecasting lower rates of growth in both the U.S. and Europe. Plus, growth in China has slowed more than expected.

“There is a correction occurring in China. Even though their growth rate is very healthy by our standards, by theirs it is very low,” says economist Dmitri Papadimitriou, president of the Levy Institute of Bard College in Annandale-on-Hudson, New York.

China’s GDP grew 6.9% last year,  missing the 7% target set by the government.

“So there is some instability in the global economy, and of course we have some more instability in the financial markets,” Papadimitriou says.

Robert Johnson, CFA, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania, agrees. “The slowdown in China and global market weakness is of concern, as is the falling price of oil,” he says.

Growth is slowing, but Americans feel fine

The domestic economy is not without challenges, including a slowing manufacturing industry, but American consumers feel increasingly secure. Consumer confidence “improved moderately” this month after an increase in December, The Conference Board reported this week.

Declines in gas prices may be helping consumers, but ever-cheaper oil is wreaking havoc in other areas.

“With the price of oil going below $30 for a few days, the Fed’s inflation forecast is unlikely to be met. When energy goes down as much as it has, it depresses some other factors, too,” says Robert Barone, partner, economist and portfolio manager at Universal Value Advisors in Reno, Nevada.

Those depressed factors include the stock market. Not only is a surplus of oil keeping share prices down, it’s also contributing to the slowdown in China. That country consumes 12% of the global oil supply.

With a lot of uncertainty and anxiety swirling around the globe, the next meeting of the Fed’s policymaking Federal Open Market Committee promises to be interesting. The March gathering will feature a news conference by Federal Reserve Board Chair Janet Yellen, as well as updated economic projections.

The projections released in December showed that most members of the FOMC believed that the federal funds rate would end 2016 around 1.5% or higher. Is that still the case after a tumultuous January? Find out March 16.


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