The Federal Reserve has chosen to keep its hands off rates for the foreseeable future, leaving the door open for further rate hikes if the economy warrants it. The central bank announced that it will keep the federal funds rate unchanged at its current level of 2.25 to 2.50 percent.
The move came as a surprise to some, as expectations were that the Fed might choose to raise interest rates in the wake of the Dec. 19 congressional vote to approve President Donald Trump’s signature tax-cut package. However, Fed chairman Jerome Powell said that the rate decision was based on economic data, which has yet to demonstrate an impetus for a rate hike.
The decision also took into account a number of economic risks, including the potential for trade restrictions to create headwinds in the economy and the possible impact of Brexit negotiations. Powell said that the Fed had considered the political ramifications of its decision, but chose to wait until more data accumulated to make an informed decision.
The decision to leave the federal funds rate unchanged for the moment leaves the central bank with a wide range of options should future economic data warrant an increase in rates. Should the economy continue to expand, the Fed could use a series of small, incremental increases over several meetings to gradually raise rates. Alternatively, the Fed could use larger, more abrupt rate hikes to slow an economy that appears to be overheating.
For now, the Fed has decided to watch and wait. Its rate decision sets the stage for future rate hikes should incoming economic data show that the economy is trending in the right direction. Meanwhile, investors will take comfort in the knowledge that the Fed appears to be in no rush to raise rates.