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Here’s Why the Fed Held Rates Steady and What it Means for Borrowers

Inflation? What inflation?

With inflation running below the Federal Reserve’s targeted 2 percent rate, the central bank elected to hold its benchmark interest rate steady at its targeted rate of 2.25 percent to 2.50 percent.

For fashion firms and retailers looking to borrow money, that means nothing has changed for now, and current borrowing rates will stay the same. The next two-day FOMC meeting is scheduled for June 18 and 19.

The Fed raises rates to cool down an economy that looks to be getting overheated, and lowers rates to spur borrowing for investment and reignite economic growth.

The FOMC, the monetary policymaking arm of the Federal Reserve on Wednesday concluded its two-day meeting. In March, the Fed elected to hold off on any further interest rate hikes given the low rate of inflation, not to mention its view that economic activity had slowed from the end of 2018.

What was different at this meeting, was the Fed’s conclusion that economic activity grew at a “solid rate.” But with inflation still below its targeted 2 percent rate, the Fed saw no need yet to raise the interest rate that banks charge each other for overnight lending, or what it calls the federal funds rate.

Wednesday’s decision was contrary to the position of President Donald Trump, who had called for a cut in rates in a tweet Tuesday. The president was seeking a rate cut by as much as 100 basis points, or the equivalent of 1 percent. According to Trump’s tweet, the economy would go “up like a rocket if we did some lowering of rates, like one point….”

In the Fed’s statement at the conclusion of the two-day meeting, it emphasized the FOMC’s mandate, which is to “foster maximum employment and price stability.” The Fed did lower the interest rate for excess reserves left at the central bank to 2.35 percent from 2.4 percent.

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And though the FOMC noted that job gains have been solid, there’s still a lingering concern over how long a strong labor market and solid economic activity can be sustained.

On Friday, government data pointed to gross domestic product growing 3.2 percent in the first quarter, a rate many called a “surprise” since several economists were expecting 2.8 percent instead. And The Conference Board on Tuesday noted that its Consumer Confidence Index rose in April, following a decline in March. Drilling down on some of the data suggests that there could be a hiccup or two on the horizon.

The Conference Board, in analyzing the GDP report, said last week that a temporary buildup of inventories and trade probably means spending isn’t likely to be sustained for the balance of the year. And economist Jeremy Cohn at Moody’s Analytics said Tuesday that consumer spending “has hit a soft patch.”

Even the Fed statement gave a clue to its cautionary thinking: “Growth of household spending and business fixed investment slowed in the first quarter….In light of global economic and financial developments and muted inflation pressures, the [FOMC] will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

Moody’s Analytics economist Ryan Sweet did note Fed chairman Jerome Powell’s use of the word “transitory” during Wednesday’s press conference when he spoke about inflation. While Sweet doesn’t expect a rate hike this year, one could be on the way next year. The economist noted that there’s a chance core inflation might rise by the end of the year.  He said that’s because the current weaknesses in the financial services, shelter and healthcare sectors aren’t attributed to the current business cycle.