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No Rate Hike: Fed Continues to Move Cautiously in 2016

There is some good news coming out of the Federal Reserve on Wednesday. Faced with reduced consumer spending, the Fed again decided not to raise interest rates. This decision was not surprising given that Fed Chair Janet Yellen foreshadowed the decision in March when she noted that they intended to move “cautiously” in 2016.

While the United States economy has shown consistent job growth and an improving housing market, it is also experiencing slowdowns in commercial investment and exports. In fact, economic growth slowed to just 0.6 percent in the first quarter of 2016.

"Economic activity appears to have slowed," the Federal Open Market Committee said. "Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high."

Only one of the twelve FOMC members, Esther George of Kansas City, remained hawkish about interest rates. Advocating for the central bank’s return to normalization, George pushed for a quarter-point hike – taking the current range from 0.5% to 0.75%.

Despite keeping its rate target near zero for eight years, the Fed has failed to generate inflation above its 2 percent target. The statement reiterated the official stance that – in the “medium term” - inflation will rise toward 2 percent but is being held back by "the transitory effects of declines in energy and import prices.”

This tepid language greatly lowered investor expectations for a June rate increase. Prior to the announcement, 31% of investors believed there would be a June rate hike. After the news…that number dropped to 19%. That’s good news in the financial markets, which reacted positively as stocks creeped slightly higher. Following the news, the Dow and S&P 500 hit their highest point of the day with the Dow gaining a modest 64 points.

"They're responding to market conditions," LaVorgna said of the Fed. "The rate should be higher but the Fed is having a hard time getting it where most economists say they already should be."

Even with Wednesday’s announcement, a rate hike in June remains on the table. In March, Yellen lowered expectations to two rate hikes in 2016, however FOMC officials continue to stress that if inflation begins to build, the entire equation will change. With the 2016 Presidential election in full swing, the IMF describing global growth as “fragile”, and other central banks driving interest rates lower, Yellen and company do not want to do anything that could add to the uncertainty.