Federal Reserve officials decided not to raise interest rates Wednesday, but still face a major debate in the months ahead over whether to tighten monetary policy more quickly in response to signs that inflation is finally picking up.
The central bank’s monetary policy committee announced after a two-day meeting in Washington that it would keep its target for short-term interest rates at between 1.5 percent and 1.75 percent, where it was set in March.
In their statement, the members acknowledged that inflation has “moved close” to their target of 2 percent annually.
The Fed isn’t likely to hold off on further rate hikes for long. It’s facing what it sees as an economy that is at full employment and is about to become even hotter by the tax cuts and government spending increases signed into law by President Trump.
Fed officials have been moving very cautiously since 2015 to reverse some of the emergency stimulus measures they implemented in the wake of the crisis, by slowly raising interest rates and steadily shrinking its $4.4 trillion in bond holdings.
Now they may move less cautiously, thanks to the signs that they have finally been successful in boosting inflation.
Inflation rose to 2 percent on an annual basis in March, right at the Fed’s target, after years of running too low. Chairman Jerome Powell and other officials have sought to raise inflation not for its own sake, but to ensure that the economy is rebounding as fast as possible and that money is not too tight.
With inflation rising and signs that the economy is only going to improve, investors expected the Fed to raise rates again in June, prior to Wednesday’s announcement. The big question was whether the Fed would, or will, signal that they will pick up the pace of future rate hikes and aim for three more this year.
Three rate increases would bring the target to as high as 2.5 percent. That would still be low by historical standards, but not too far off from where Fed officials think short-term interest rates will settle over the long run.
The Fed manipulates interest rates as a tool to regulate total spending in the economy, to try to prevent uncontrolled inflation and to smooth out business cycles. Officials have thought that interest rates are going to be permanently lower because of the aging population, increased demand for U.S. bonds from abroad, and other factors.
The biggest question that Powell and the other officials have to address is how many people currently on the sidelines of the labor market might pick up the job hunt if unemployment keeps falling. Those people aren’t counted in the official unemployment rate, but it’s possible that there are many of them prepared to take jobs if they are available. If that’s the case, wages and inflation might be held in check for longer.
Wednesday’s statement contained one hint that they do not intend to change plans now and rapidly tighten money just because inflation is near target: It noted that the target is “symmetric,” meaning they are comfortable with inflation running a bit over 2 percent if necessary.
All eight voting members of the committee voted in favor of the action.
