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Is weakening job growth behind Fed's decision to not raise bank rates?

Over the course of the latest Federal Open Market Committee (FOMC) meetings, which concluded Nov. 1, it is entirely possible that some committee members longed for the time not too long ago when its biggest concern was that inflation was too low. Now in deciding to leave the federal funds target rate unchanged, the FOMC faces a more challenging policy-making environment.

The Fed's latest announcement

The FOMC announced that it is leaving the federal funds target rate at between 1.00 percent and 1.25 percent. After raising rates in December, March and June, the FOMC's pace of rate increases has now slowed.

This slowdown in rate increases is despite the FOMC's stated goal of "normalization," which involves restoring rates to more normal levels after the extraordinary measures to lower rates that were taken in response to the Great Recession. There was a time when the FOMC largely attributed its caution about raising bank rates to the fact that inflation was running below its 2 percent target. Now, however, there may be a more troubling reason for caution: weakening job growth.

Was weak job growth the reason for caution?

Whereas previously the Fed was faced with the relatively happy problem of strong job growth but weak inflation, recent months have seen these trends flip to an environment of weaker job growth and rising inflation. In its latest statement, the FOMC acknowledged that job growth has fallen and inflation has accelerated recently, but dismisses both developments as being due to the severe hurricane damage suffered this season.

That explanation is less than satisfactory because both the weakening job trend and strengthening inflation predate Hurricanes Harvey, Irma and Maria. For example, the six months of job growth through August was the weakest such period since 2012.

Under normal circumstances, rising inflation would give the Fed strong incentive to raise rates, and the goal of rate normalization should only heighten that incentive. As things stand, it seems the recent weakness in job growth is giving the FOMC more cause for concern than it is letting on.

What now for consumers and interest rates?

Low interest rates are generally good for borrowers and bad for savers, though it is important to note that the Fed does not directly control consumer interest rates. For example, the FOMC has raised the fed funds rate by 1 percent since late 2015. Over the same time, credit card rates have risen by more than that, while 30-year mortgage rates remain more or less unchanged.

As for savers, according to the FDIC, the national average savings account rate has yet to respond to the Fed's series of rate increases since 2015. However, bank rates tracked by MoneyRates.com show that some banks have begun to raise savings account rates, and there is a widening difference between the highest rates and the lowest rates. Consumers tired of their savings accounts not keeping up with inflation would be wise to seek higher savings account rates themselves rather than waiting for the Fed.

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