Fed statement today cements September interest rate increase

Today Federal Reserve left its benchmark interest rate at 1.75% to 2.00% and described the U.S. economy in terms that make an interest rate increase at the central bank’s September 26 meeting a virtual certainty (absent some startling news event).

The CME Fed Watch tool, which calculates the odds of an interest rate move by the Fed by looking at prices in the Fed Funds Futures market, put the odds of a September increase at 91.2%. The odds of an additional increase at the December 19 meeting climbed to 67.0% today.

The Fed said economic activity has been “rising at a strong rate,” and unemployment “has stayed low,” the Fed’s Open Market Committee said in its statement. “Household spending and business fixed investment have grown strongly.”

The Fed’s statement and inaction didn’t significantly move the stock or bond markets suggested that the financial markets have largely priced in a September interest rate increase.

Recent economic data have certainly supported that conclusion.  The economy grew at a 4.1% annual rate in the second quarter, its fastest pace since 2014. Inflation is close to the Fed’s 2% goal, with headline inflation rising at 2.2% for the year ending June, while the core rate, which excludes food and energy prices, was up 1.9%. Unemployment was 4% in June, which is below the Fed’s 4.5% estimate of full employment.
Wednesday’s decision was unanimous 8-0.