The Federal Reserve announced Thursday that it would not yet raise its target for short-term interest rates, prolonging a months-long drama over when the Fed will see the economy as being health enough to withstand gradual rate hikes.
The U.S. central bank’s decision, issued Thursday following a two-day meeting in Washington, means that it will continue to hold rates near zero for at least a month longer, after keeping them there since the depths of the financial crisis in 2008.
The decision to delay tightening Thursday is a sign that Fed Chairwoman Janet Yellen and her colleagues believe that one of the main conditions they set for raising rates has not been yet: The economy isn’t clearly signaling that inflation will rise toward 2 percent in the months and years ahead.
That conclusion, reached after years of job growth and recovery from the financial crisis, was controversial among Fed officials in the lead up to Thursday’s decision.
Nevertheless, despite the fact that the U.S. economy has moved from crisis, massive job loss, and widespread foreclosures to near-normalcy in the time that the Fed has held rates near zero, several recent events have given Yellen and company concern.
China has faced questions about its growth prospects. The dollar has appreciated sharply, and world markets have experienced wild swings.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the statement read, adding that officials would monitor overseas developments.
In addition to those recent unwelcome developments, the Fed also has failed to hit its 2 percent inflation target for the past three years, leading some at the central bank to express concern about the belief that prices will rise as expected in the next few years.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented from the decision, arguing that the Fed should have raised its target interest rate to .25 to .50 percent. It was the first vote against a monetary policy decision this year.
Postponing the rate hike sets up further speculation about when the Fed could act, even though Yellen and Vice Chairman Stanley Fischer have long argued that the exact timing of “liftoff” is less important than the pace at which they’ll raise rates in the years to come.
The Fed’s October meeting is one possibility. Generally, the Fed does not make high-profile decisions except at one of the four quarterly meetings each year that include a Yellen press conference and updated projections from Fed officials. Yellen, however, has said that every meeting is a “live meeting,” and that the Fed could call a teleconference to make the announcement.
If not October, the December meeting is even more likely. Prior to Thursday’s meeting, bond market prices indicated that investors, on balance, expect a rate rise by then, and many high-profile private-sector economists, such as Goldman Sachs’ economists, had predicted a rate rise then. Those expectations match Yellen’s repeated assurances throughout the year that she expected a rate increase in 2015.
Whenever the Fed decides to act, it sent a signal on Thursday that more monetary easing is justified given the current economic conditions and outlook.
The Fed’s target interest rate, a rate at which banks lend funds to each other overnight, influences all interest rates of longer maturity throughout the economy. Those include Treasury securities, business loans, and consumer credit products like home loans and credit cards.
Yellen was set to face the media later Wednesday afternoon.
