Fed leaves interest rates unchanged

Worried that economic growth is slowing, officials put off a rate hike until another month

By Jon Hilsenrath
Dow Jones Newswires

WASHINGTON — The Federal Reserve left short-term interest rates unchanged after weeks of market-churning internal debate about whether it was time to end an era of near-zero rates in acknowledgment of the stronger domestic U.S. economy and job market.

A majority of Fed officials still believe the central bank will raise rates before year-end, but the central bank showed a bit less conviction on that point. In June, 15 of 17 officials said they expected to raise rates this year, according to official projections released with the Fed’s policy statement; on Thursday, the number of people who expected to raise rates this year slipped to 13.

The Fed indicated in its policy statement trepidations about recent turbulence in financial markets and in economies abroad. “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 Fed said. It added that it was “monitoring developments abroad,” a signal of the Fed’s heightened state of worry that slow growth outside the U.S. could hurt the American economy.

Still, the fact that most officials believe they will move rates up this year suggests a view that these concerns will subside in the weeks ahead
Fed Chair Janet Yellen said in the news conference that officials discussed raising rates, but decided to hold off “in light of the heightened uncertainties abroad” and the prospect of low inflation for a longer period. The Fed wants “a little bit more time” to make sure the U.S. economic outlook hasn’t fundamentally shifted, she said.

Fed officials have been signaling for months they plan to raise rates this year — seven years after pushing them to exceptionally low levels in December 2008 in response to the financial crisis. Central to their optimism is a view that labor markets are improving rapidly and reducing slack in the economy, a precursor to some lift in inflation. Unemployment was 5.1 percent in August, in the range officials expect to see over the long term. Inflation has been running below 2 percent for more than three years.

Fed officials appeared to be on track to move at this week’s policy meeting, but a variety of factors gave them pause, including a stronger dollar, stock- and bond-market volatility and signs of a slowdown in China, the world’s second-largest economy.

They are now on watch to make sure these threats don’t turn into a bigger problem for the U.S. economy.

A strong dollar, for instance, could put downward pressure on exports and imported inflation, movements at odds with the Fed efforts to spur economic growth and raise currently low inflation.

The Fed said, as it has before, it would raise rates when it saw “some further improvement” in labor markets and when officials become “reasonably confident” that inflation will rise toward 2 percent in the medium term.
Before the meeting, investors had come to doubt a move. Traders in the futures markets attached a 27 percent probability to a rate increase Thursday, but a 64 percent probability to an increase by December.

One reason for the shifting outlook: Officials have become a bit less optimistic about the economy’s long-run growth potential. They projected the economy will grow at a rate between 1.8 percent and 2.2 percent in the long-run, down from their June estimate of growth of 2 percent to 2.3 percent in the long-run.

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