By Matthew Kochen,
Money and Investing Writer
The federal funds rate is the interest rate charged for the short-term, usually overnight, loans depository institutions such as banks and credit unions make to each other in order to meet the balance each institution is required to keep with the Federal Reserve.
In the effort to nurse the economy back to health through the recession brought on by the financial crisis in 2008, the Fed lowered the rate to the range of 0 percent to 0.25 percent in order to stimulate the housing market and the economy at large.
On Thursday, Yellen made the announcement in line with the overall consensus from industry experts: the Fed will not raise the rate at this time.
The reasons the Fed gave for its decision not to hike up the rate because of recent market volatility, international economic turmoil, high unemployment and low inflation.
The Federal Reserve is tasked with the dual mandate of striving for maximum employment and maintaining price stability.
The unemployment rate sits at 5.1 percent, a seven-year low and well below the Fed target of 6.5 percent.
On the other hand, the inflation rate has been stubbornly lagging behind the target rate of 2 percent the Fed is aiming for.
Developing economies, such as China and Brazil, have been slowing and faltering as of late, notably China devaluating its currency.
Although historically August and September are bad months, August was a rough month in the stock market with several large plunges and rallies.
The S+P 500 fell 3.2 percent in a day, finishing below 2,000 for the first time since early this year.
Federal-funds futures, which bet on whether the Fed would raise the rate or not, had estimated a 21 percent likelihood that the rates would be raised.
Experts such as Goldman Sachs Group Inc. (NYSE: GS) CEO Lloyd Blankfein, former Treasury Secretary Lawrence Summers, and Berkshire Hathaway Inc. (NYSE: BRKA) Chairman and CEO Warren Buffett all made their opinions known that the Fed would not hike rates, nor should they.
The previous five announcements the Federal Open Market Committee, the committee that sets the rate, have made have been unanimous in this decision to stay the rate, although in this round, Richmond Fed President Jeffrey Lacker dissented from the others, stating, “I’m not arguing that this economy is perfect by any means, but nor is it on the ropes, requiring the stimulus of low monetary policy interest rates to get it back into the ring… It’s time to align our monetary policy with the significant economic progress that we have made.”
The U.S. stock market has tripled in value since the low in March 2009.
Many feel that much of this rally has attributable to keeping rates low, but has led to an overvalued market.
This makes the speculation and decisions of the Fed reverberate without the market.
In the immediate aftermath of the announcement, the Dow Jones industrial average rose 1.1 percent, the S+P 500 rose 1.2 percent and the NASDAQ composite rose 1.4 percent.
Also, the yield on the 10-year U.S. Treasury note fell to 2.23 percent.
Investors now have two months to adjust before the Fed reevaluates and makes another decision December 17.
A version of this article appeared in the Tuesday, September 22nd print edition.
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