Atlanta Advisor: Fed Could Raise Interest Rates in December

ATLANTA, GA — Wednesday's news that the Fed has voted to keep key interest rates unchanged is fueling speculation for a rate hike in December.

Officials announced Wednesday at a meeting of the Federal Open Market Committee that the Federal Reserve will keep interest rates steady between 0.25 and 0.50 percent, while affirming a favorable outlook for the economy as a whole.

"The Fed is very clearly making a stronger statement that it could be raising rates in December," says Michael Merlin, managing director of wealth management and private wealth advisor of Hansberger & Merlin at Morgan Stanley, which has an office in Buckhead. "There were three dissenting officials in the vote, and the case for raising rates has strengthened."

Janet Yellen, the Fed chair, indicated in a speech at the end of August that she expected to raise rates soon.

Some expected that a rate hike would be announced this month, but today's meeting confirms that the reserve bank is likely to wait until December to officially change pace. In December 2015, the Fed raised the federal funds rate for the first time since the 2008 financial crisis, after leaving it near zero for years to stimulate the economy.

"I also think the Fed wants to watch a lot of other indicators that could affect market volatility, including the upcoming presidential election," Merlin said. "They'll also be watching oil prices and earnings reports, and other indicators between now and the end of the year."

• See also: Fed Won't Raise Rates Just Yet, But Economy Is Strong: Report

The Fed said the nation's labor market has strengthened and economic activity has picked up. Although the unemployment rate is little changed in recent months, job gains have been solid.

Household spending has been growing strongly but business fixed investment has remained soft.

Why do interest rates matter?

Well, most people notice when their savings accounts have low rates, because they earn less interest on their money. But low interest rates also encourage businesses to borrow more money, which should mean they're more likely to invest in new projects and hire more people, which can lift the economy as a whole.

When making these decisions, the Fed is required to consider its dual mandate of both keeping unemployment low and maintaining price stability. Under typical conditions, keeping interest rates low can spur business growth and thus lower the unemployment rate while risking higher inflation.

However, as the Fed's statement notes, unemployment remains relatively low and inflation continues to fall under its target of 2 percent, where it has mostly remained since the Great Recession. The report cites low energy prices as the major cause of low inflation, which the Fed expects to continue in the short run; over the medium-term, officials expect inflation to reach its 2 percent target.

A strong economy and low unemployment are generally reasons to expect the Fed to raise interest rates, but low inflation is generally seen as a reason to keep rates low. Economists disagree about the best path forward under current conditions, and the Fed's actions and messages are being closely monitored.

The report cites solid employment gains, despite a steady unemployment rate, and growing household spending as positive trends in the economy, though businesses broadly still appear reluctant to make serious investments.

The FOMC's decision was affirmed by a vote of 7-3, with Yellen siding with the majority. Three members of the committee favored raising rates by 0.25 percent this month.

Staff Writer Cody Fenwick contributed to this report.