Fed leaves rates alone, moves closer to selling off bonds

Federal Reserve

WASHINGTON — The Federal Reserve is keeping its key interest rate unchanged at a time when inflation remains persistently low. But it signaled Wednesday that it’s edging closer to gradually shrinking its bond holdings, a step that would likely boost long-term borrowing rates including mortgages.

The Fed noted Wednesday in a statement that inflation has stayed undesirably low even though the job market keeps strengthening, with the unemployment rate just 4.4 percent. Normally, solid hiring drives up wages and prices. But the Fed’s preferred inflation gauge has moved further below its 2 percent target.

Too-low inflation can slow economic growth by causing people to delay purchases if they think they can buy a product for a lower price later.

The central bank decided after its latest policy meeting to leave its key rate unchanged in a range of 1 percent to 1.25 percent after having raised rates twice this year. The Fed says it still envisions further “gradual” rate hikes. But many economists say they foresee no further rate increases this year unless inflation picks up. If inflation does accelerate, the Fed may feel comfortable raising rates again in December.

Addressing its bond portfolio, the Fed slightly changed its statement to say such a reduction would begin “relatively soon,” provided the economy improves further.