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How Important Is Today's Fed Interest Rate Decision?

Following the conclusion of the June FOMC meeting today, the Federal Reserve will announce its policy statement and interest rate projections. While an immediate rate hike is not expected, conflicting economic reports have many investors feeling that today's Fed announcement could be significant.

The wheels had basically fallen off a June rate hike over the last couple of months, but the release of May's job report put the final nail in the coffin. The U.S. created just 38,000 new jobs in May, the weakest monthly growth in over five years.

The May jobs report also showed that nearly 500,000 people dropped out of the labor force, more than half of the country's major industries cut jobs, and temporary employment fell by about 21,000 jobs. The softening of temporary employment is an especially bad sign, as that segment has lost nearly 64,000 jobs this year.

Back in December, the Fed raised its borrowing rate to a range of 0.25%-0.5%. After maintaining near-zero rates for nearly a decade, the Fed's decision to raise rates was a sign to many that the central bank was ready to move past the economic recovery period after the recession.

At the time, it seemed that the Fed's small rate hike would be the first in a consistent series of hikes that would return the borrowing rate to a more long-term level. However, volatile economic conditions around the world and a horrible start to the year in the domestic markets quickly put an end to that schedule.

Of course, the issue with maintaining low interest rates over a long period of time is typically inflation. Oddly enough, however, the United States is not seeing intimidating inflation rates. The five-year breakeven inflation rate currently sits at about 1.5%.

With the recent issues in the job market, added to the fact that inflation really isn't that concerning, it's pretty clear that the Fed doesn't need to rush its rate hikes right now. Even still, the central bank's announcement will be important because it should give investors a sense of how soon the Fed thinks it will be able to raise rates.

Following the initial announcement at 2 p.m. EDT, Fed Chairwoman Janet Yellen will hold a press conference. Somewhere, either in the announcement or Yellen's statements, there should be some sort of forecast about the future.

For now, low interest rates seem to be what the markets need. Only time will tell whether economic conditions will improve from here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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