9.18.14: Interest Rates won't go up any time soon

September 18, 2014

 The Federal Reserve said Wednesday the labor market is strengthening but still needs the central bank’s support, reassuring financial markets that a key interest rate will stay near zero in the months ahead.While job growth has strengthened this year, millions of Americans have been unemployed more than six months. Others have stopped looking for work.

Stocks slipped right after the Fed’s statement was released at 2 p.m. ET, but the Dow Jones industrial average ended the day at a record of 17,156.85.

Some economists expected the Fed to remove the “considerable time” wording from its statement. The jobless rate has fallen to 6.1 percent from 7.2 percent over the past year, and the Fed said Wednesday it expects it to drop to about 5.9 percent by year’s end, below its June forecast.

Despite Fed policymakers’ assurance that the federal funds rate – which affects borrowing costs across the economy – likely will stay low, their forecasts Wednesday show they expect it to rise slightly more rapidly than they had in June. They predict it will be about 1.3 percent by the end of the year and about 2.9 percent at the end of 2016. Those estimates continue to suggest the first rate hike is likely to occur in mid-2015.

The Fed also finalized its plan for raising the fed funds rate, which is what banks charge one another for overnight loans. The Fed plans to raise the rate it pays banks to park money at the Fed and the rate it pays money-market funds for loans. Banks likely would not lend to each other for less than what the Fed pays.

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