Fed Stands Pat on Interest Rate, But Signals Move to Sell Bonds

(CN) — The Federal Reserve announced Wednesday that it will not change a key interest rate, but also signaled it’s closer to reducing its bond holdings, a move that would boost long-term interest rates.

In a statement issued Wednesday afternoon, the Fed said inflation has stayed low despite the strength of the job market and an unemployment rate that stands at just 4.4 percent.

Ordinarily, a strong jobs market drives up wages and prices. But at present, inflation remains below where the Federal Reserve would like to see it, falling below 2 percent.

Over the past 12 months, the inflation gauge the Fed monitors most closely has risen just 1.4 percent, according to the latest data. That’s down from a 1.9 percent year-over-year increase in January.

When the inflation rate is too low or falling it can slow economic growth because consumers put off purchases to see how low prices will go.

In June, the Fed opted to not to raise its key interest rate, leaving it in a range of 1 percent to 1.25 percent, after having raised rates twice this year.

The Fed says it still envisions additional,  gradual rate hikes, but that’s beginning to look more unlikely, economists say.

The central bank did not set a date for reducing its $4.5 trillion in bond holdings, saying only that it would begin “relatively soon.”

It plans to sell off about $6 billion in Treasury bonds and $4 billion in mortgage bonds.

The Fed’s statement Wednesday coincides with a period of lackluster growth for the U.S. economy.

Between January and March, the nation’s gross domestic grew at an anemic 1.4 percent annual rate. Since then, the growth rate appears to have picked up — most estimates suggest the GNP grew by 2.5 percent between April and June — but the government’s preliminary estimate of growth won’t be released until Friday.

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