As expected by the entire market, the Federal Reserve chose to leave interest rates unchanged on Wednesday ahead of the upcoming presidential election next Tuesday. The benchmark federal funds rate still sits at a target range of 0.25%-0.5% after the last increase almost a year ago, when the Fed gave estimates of four interest-rate increases in 2016. With annualized third quarter GDP growth at 2.9% and other economic indicators showing positive signs, there are high chances that the Fed will take the last opportunity to raise rates in 2016 when they meet again in mid-December.
While the economy has been at or around the target unemployment rate of 5% for some time now, inflation has still yet to hit the 2% target that the Fed has set. In the past 12 months leading up to September 2016, the inflation rate was 1.5% while core inflation was 1.7%. However, the Fed has stated that they no longer expect inflation to remain low in the near term, setting the stage for a rate hike next month.
Still, as we’ve seen over the past year when the Fed was getting ready to raise rates, there can be extraordinary events that can create increased uncertainty and ultimately force them to stand pat. Something like a Trump victory next week will likely be significant enough to raise unpredictability concerns.