Federal Reserve officials voted Wednesday to hold interest rates steady, all but guaranteeing that they will let a year transpire between increases, but signaled that they would raise rates later this year.
In a statement released after a two-day meeting in Washington officials said that the case for raising rates “has strengthened” and that they delayed to “wait for further evidence” that the economy is expanding. Separately, projections released by the Fed members indicated that they expect one hike before the end of the year.
Those signs are likely to be interpreted to mean that Chairwoman Janet Yellen and the Fed are preparing to move on a rate hike in December.
The decision, which was broadly expected by investors, means that for now the central bank will continue to target overnight interest rates of 0.25 percent to 0.5 percent, an extremely low range by historical standards. The Fed last raised rates in December, the only such rate hike since it lowered rates to zero in 2008.
Three voters, an unusually high number, dissented from the decision, saying that they preferred to raise rates now: Regional bank presidents Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston.
Those dissents reflected the public disagreement prior to the meeting among members about the correct course of action, with some calling for the central bank to move toward tighter money.
Wednesday’s decision, however, means that it will likely be three more months before the Fed raises rates, giving officials more time to confirm their belief that the economy is on the right track and lessening the risk that they prematurely choke off a fragile recovery.
The Fed does have a meeting scheduled for early November, just before the elections, but it is seen as unlikely that they would make a change then. Although members have said that the election will not affect their decision-making, investor uncertainty about the outcome could weigh against Fed action. Furthermore, the Fed tends to leave big decisions for meetings at which Chairwoman Janet Yellen has a press conference scheduled, which she does not in November.
Although one 0.25 percentage point increase in overnight interest rates is not likely to affect borrowing and spending decisions, the signal that it would send about the Fed’s overall plans for monetary policy could have major repercussions. Fed policy influences interest rates on credit instruments throughout the economy, such as corporate debt, mortgages and credit cards. A higher interest rate target is thought to translate to higher rates overall, and consequently less borrowing and spending, and in turn less inflation. Stocks rose and bond yields fell in response to Wednesday’s announcement.
While, as a group, Fed members have said consistently that any decision to raise rates further would hinge on the strength of incoming economic data, some members did indicate that acting this month was a possibility.
Two members, Federal Reserve Bank of San Francisco President John Williams and Boston Fed President Eric Rosengren, have argued that raising interest rates sooner is preferable to prevent easy money from generating financial bubbles in markets like commercial real estate.
The biggest factor swaying the Fed toward tightening monetary policy has been the improvement in the U.S. labor market. At 4.9 percent in August, the unemployment rate is not far from where Fed members think it would settle if the economy were fully healthy. Easy money with tight labor markets would translate over time into higher inflation, in the Fed’s common thinking.
Other members, however, have said that they are not convinced that higher inflation is around the corner. Inflation has been running below the Fed’s 2 percent target since 2012, just one of several factors that have led some monetary economists to think that the Fed is not in danger of keeping money too loose and should leave interest rates lower for longer.
In Wednesday’s statement, the Fed said that risks are “roughly balanced,” meaning that they see themselves at much in danger of stoking too much inflation by easing as they do keeping growth weak by tightening.
While the Fed sees commerce accelerating in the months ahead, driving up inflation toward their 2 percent target, they also project that economic growth over the long run will be weaker. As a group, they estimate long run real gross domestic product growth of 1.8 percent, below the 2 percent they saw in June and well below historical norms.
Lower future growth also implies lower future interest rates. Fed officials now think that short-term interest rates will only rise to 1.1 percent by the end of next year, and 2.9 percent in the long run. In the past, those rates have risen well above 5 percent during economic peaks.
