The Federal Reserve will leave its interest rate target unchanged, a broadly expected decision Wednesday that means that at least half a year will have elapsed between Fed moves on interest rates.
Officials at the central bank, however, still projected that they would raise rates twice this year, the key detail that investors were looking for Wednesday. At the same time, the Fed members indicated that they now see short-term rates rising slower in future years, ultimately rising from below 0.5 percent today to just 2.4 percent in 2018, down from a previously projected 3 percent.
Speaking at a press conference following the decision, Fed chairwoman Janet Yellen said that “the labor market appears to have slowed down, and we need to assure ourselves that the underlying momentum in the economy has not diminished” beofre proceeding with rate hikes.
While Yellen has suggested for months that she expects the economy to be strong enough for the Fed to impose “gradual” rate increases this year and next, those plans have been pushed back by recent warning signs about the economy.
Wednesday’s announcement cited in particular that the pace of labor market gains has slowed.
“The state of the labor market is still healthy, but there’s been something of a loss of momentum,” Yellen said.
Prior to Wednesday’s announcement, bond market prices indicated that investors saw only about a 50-50 chance of a rate hike this year, with that move coming after the presidential election, in December. Those odds fell after the decision, placing expectations for the next move in 2017. The Fed’s current target for short-term interest rates is between 0.25 percent and 0.5 percent, an extremely low range by historical standards.
Among the concerns holding the Fed in place are potential risks stemming from overseas, including slowing growth in China, next week’s “Brexit” vote in the United Kingdom, and even the possible economic fallout from the refugee crisis in Europe.
“International uncertainties loom large here,” Yellen said of the Fed’s decisionmaking.
An even greater worry was that the late spring may have seen the start of a slowdown in jobs growth, a fear punctuated by the weak jobs report for May that showed only 38,000 new positions created.
In a major speech in Philadelphia following the jobs report, Yellen noted that she still thought the jobs news over the past year has been “generally good,” but indicated that the odds of a labor market slowdown would be one of the questions Fed members would weigh during their meeting.
More broadly, Fed members been mulling a conflicting set of data about the U.S. economy.
At 4.7 percent in May, unemployment is not far from its “natural” rate, in Fed members’ eyes. If they maintained loose monetary policy for much longer, they would risk the possibility of inflation rising too much.
At the same time, inflation, at 1 percent in April by the metric the Fed favors, is below the Fed’s 2 percent target, and has been for four years. Meanwhile, inflation expectations have fallen to record lows in some surveys, a concern for Fed members because expectations can become self-fulfilling and shape consumers’ and businesses’ spending plans.
Some Fed officials have cautioned that the Fed risks choking off the recovery if it raises rates amid low inflation and falling inflation expectations. Federal Reserve Bank of Chicago President Charles Evans, for instance, suggested this month that the central bank should rule out further rate increases until core inflation reaches 2 percent.
Yellen, for her, part, has warned that waiting too long to tighten monetary policy could hurt the economy. Because the Fed’s moves take time to translate to the real economy, she has said, the Fed could fall behind as inflation rises, forcing them to raise rates abruptly later on and risking market turmoil.
No members of the Fed’s monetary policy committee dissented from Wednesday’s decision. Esther George, the head of the Kansas City Fed who has dissented at recent meetings in favor of raising rates, voted in favor of the monetary policy statement.
