Interest Rate Hike Explained: What Will Happen At The US Federal Reserve's Next Meeting?

Following a December hike in the Federal Reserve’s interest rate target, Fed Chairman Janet Yellen announced Wednesday the central bank’s decision to avoid giving the rate its third hike since the recession.

Analysts were largely expecting the Fed to delay another hike in the federal funds rate, keeping the rate at which banks lend to one another within a range of 0.5 to 0.75 percent. The move will likely slow the rise of interest on loans and assets that tend to follow the Fed’s policy rate, such as mortgages, credit card debt and government bonds.

Many economists based their expectations for a delay on the likelihood that the Fed would skip a rate increase on the assumption that the central bank would prefer to wait for the full impact of President Donald Trump’s economic policies to take hold. Some of those policies, such as barriers to trade and immigration, could dampen the economy. Others, like a $1 trillion stimulus plan and some forms of deregulation, could cause the economy to balloon in an era of already solid growth. The Fed raises its policy rate to keep inflation in check while the economy is growing, and lowers it to spur investment and borrowing when times are tough.

“At the moment there’s incredible uncertainty surrounding fiscal policy and the potential for stimulus and the composition of that,” Paul Ashworth, chief North American economist at the London-based research firm Capital Economics, told Reuters. “The Fed can’t react until it knows what to react to.”

The probability of another rate hike is likely to increase as months pass, according to the CME Group, a financial market company, which uses federal funds rate futures prices to gage the chance of a rate adjustment. That’s likely because Yellen has in recent weeks stressed the importance of returning the federal funds rate to a “neutral” level of about 3 percent — high enough to be able to lower it in response to some sort of economic catastrophe and low enough to be able to heighten it in case inflation gets out of control. After the December rate hike, she also declared the Fed’s intentions to raise the rate three times in 2017.

With Wednesday's meeting over, the bank’s monetary policy committee will have seven meetings left for the year to accomplish that goal.