Federal Reserve officials announced Wednesday that they would leave the central bank’s interest-rate target steady, while also issuing a vote of confidence in the U.S. economy. The official statement of moentary policy released Wednesday afternoon highlightedrecent “strong” job growth and consumer spending and declared that “near-term risks to the economic outlook have diminished.”
While the decision not to raise rates was widely expected, the positive description of the economy leaves open the possibility that the Fed may act later this year to raise rates from the current target of between 0.25 percent and 0.5 percent. Previously, investors had been betting that the earliest the Fed might raise rates would be in the spring of 2017.
The dollar rose immediately rose following the news, while stocks fell, a possible reaction to the prospect of tighter monetary policy.
Fed officials had expressed worries throughout the summer about prematurely moving away from low short-term rates, which influence interest rates on financial instruments throughout the economy and are meant to generate more spending by households and businesses.They’ve been reluctant to spell out an end to the era of very low rates even amid mounting signs that the U.S. economy is near full strength.
The Wednesday to leave rates unchanged is a departure of sorts from as recently as late spring, when they signaled that they were prepared to raise rates if the economy continued to gain momentum. But two weak jobs reports and the financial market turmoil from the June Brexit referendum in the United Kingdom were enough to sway them away from acting.
There have been also been signs of a broader intellectual change within the Fed. Some officials have embraced the idea that slow growth and uncertainty overseas could mean that low interest rates are appropriate, even though many traditional signs would point to a need for much higher rates.
Chief among those indicators is that the unemployment rate is below 5 percent, which some officials consider full employment.
The biggest hint that the monetary policy rules of thumbs of past decades might not apply is that inflation remains low, even after years of near-zero interest rates. By the Fed’s preferred metric, inflation hasn’t reached its 2 percent target in four years, and inflation expectations remain historically low.
That situation, Fed governor Daniel Tarullo said this month, provides the Fed with an “opportunity” to drive unemployment down even further without risking out-of-control inflation.
Yet Wednesday’s decision suggests that Fed officials may be willing to look beyond those concerns to lift rates sometime this year.
The Fed will not have another meeting until late September, the earliest point at which they could raise rates or prepare investors for another hike.
The last time the Fed raised rates, in December, officials made sure to spell out in the meeting beforehand that they would likely be doing so to avoid surprising investors. That rate hike was the first and only since the Fed lowered rates to zero to counteract the financial crisis. They did not do so in Wednesday’s statement.
That leaves investors to try to guess at the Fed’s plans based on speeches and interviews by individual Fed officials over that time, and from incoming economic data.
“The count down to a rate hike in September/ December will start in earnest if we get another strong jobs report for July on August 5th,” Mizuho economist Steven Ricchiuto wrote in reaction to Wednesday’s statement.
One member of the Fed, Federal Reserve Bank of Kansas City president Esther George, dissented from Wednesday’s statement, saying that the target rate should be raised a quarter of a percentage point.
