The Cable

U.S. Federal Reserve Cancels Interest Rate Hike Amid Concerns About China

Seven years after the Great Recession, the Fed keeps money dirt cheap.

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Citing concerns about the strength of the global economy and China specifically, the Federal Open Market Committee put off a long-anticipated rate hike Thursday that would have increased the cost of borrowing. In other words, seven years after the global financial meltdown, money for investors and consumers is still dirt cheap, a sign that the U.S. economic recovery is far from robust.

Wall Street analysts and policymakers around the world have been anticipating a rate hike since March. The cost of borrowing from the U.S. central bank hasn’t gone up since 2006 and has been near zero since 2008.

In a press conference after the announcement, Fed chief Janet Yellen specifically cited China’s economic slowdown as a primary concern.

“The situation abroad bears close watching,” she said. “In light of the heightened uncertainties abroad…the committee judged it appropriate to wait for more evidence” of sustained economic growth in the United States.

“We want to take a little bit more time to measure the likely impacts on the United States,” Yellen added. It’s rare for the central bank to acknowledge outside threats to the U.S. economy, even as Yellen said, “Domestic developments have been strong.”

Increasing the cost of borrowing poses a risk to the fragile U.S. economic recovery from the Great Recession. Businesses and companies might be reticent to take out loans if it’s more expensive to pay them back, which could lead them to spend less. This could damage economic growth. Right now, the World Bank projects the American economy will grow 2.7 percent this year.

Keeping rates near zero also has a direct impact on American consumers. It makes it cheaper for people to take out home loans and buy cars.

In recent months, Yellen and other Fed officials have sent mixed messages on when the hike would come. Minutes from the Fed’s June meeting cited concerns about China. The world’s second-largest economy is expected to grow by only 7 percent this year, which pales in comparison to its expansion over the last decade. There’s also the potential fallout from the Greek debt crisis. Voters there head to the polls this Sunday to elect a new government which must implement harsh European austerity demands in exchange for a third bailout of 86 billion euros, or $97 billion, that Athens desperately needs to pay its bills.

The United States is largely insulated from Greece, but continued economic uncertainty there does have a spillover effect into the rest of the European Union, which has struggled with anemic growth for years. China is a different story, as Yellen noted.

As China’s stock market plummeted — it’s down more than 40 percent this summer — the Dow Jones industrial average followed, dropping 1,000 points on Aug. 24, eventually ending the day down 588 points. Other wild swings due to Beijing’s manipulation of its currency and continuing evidence of China’s slowdown were common throughout the summer. U.S. stocks were down 6 percent in August.

Combined with low oil prices that Yellen said would keep inflation below the Fed’s target of 2 percent and a lower-than-expected jobs report in August, the risk of raising the cost of borrowing right now is too great, decided Yellen and other Fed officials. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, voted to raise rates at the meeting. It’s the first time someone has done so this year.

The Fed said Thursday it still plans on raising rates this year. It meets again in October and December. But four members of the Open Market Committee disagreed and said rates would not raise until 2016 or later, Yellen said.

Photo credit: Mark Wilson/Getty Images

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