Federal Reserve Board Declines To Raise Interest Rates Again
An unsurprising decision from the Federal Reserve.
WASHINGTON — A divided Federal Reserve left its benchmark interest rate unchanged on Wednesday, pressing ahead with its economic stimulus campaign for at least a few more weeks in the face of growing pressure to raise rates.
Janet L. Yellen, the Fed’s chairwoman, said a majority of Fed officials simply did not see a reason to pull back. Low interest rates are still aiding the economic recovery and are not causing the economy to grow too fast.
“We’re generally pleased with how the economy is doing,” Ms. Yellen said at a news conference after the Fed’s announcement. “The economy has a little more room to run than might have previously been thought. That’s good news.”
But three members of the Fed’s 10-member policy-making committee voted to raise the benchmark rate, the largest number of dissents since December 2014. That reflects growing concern that the Fed is waiting too long to raise rates.
In a new round of economic projections published on Wednesday, 14 of 17 Fed officials said they expected to raise the benchmark rate at least once this year. The Fed’s next scheduled meeting is in November, six days before the presidential election, and another will be held in mid-December. Many analysts and investors expect the Fed to wait until at least December before acting.
The Fed said in a statement that reflected the views of the majority that economic conditions were improving.
“The growth of economic activity has picked up from the modest pace seen in the first half of the year,” it said. But the statement said that inflation remained slower than the Fed’s desired pace, adding, “Near-term risks to the economic outlook appear roughly balanced.”
Ms. Yellen said differences among Fed officials were easy to overstate. Board members agreed that continued growth would warrant a rate increase.
“Our decision does not reflect a lack of confidence in the economy,” she said.
Most officials simply wanted to wait a little longer before moving.
“The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” the Fed said in the statement.
The three dissidents, all of whom voted in favor of raising interest rates by a quarter-point in September, were Esther L. George, president of the Federal Reserve Bank of Kansas City; Loretta J. Mester, president of the Federal Reserve Bank of Cleveland; and Eric S. Rosengren, president of the Federal Reserve Bank of Boston. The statement did not explain their votes, but in recent weeks the three officials all said publicly that they saw growing risks in waiting.
The last time three Fed officials dissented from a policy decision was nearly two years ago, when a bloc of reserve bank presidents wanted Ms. Yellen to move more quickly to tighten policy.
The Fed is not only hesitating to raise rates this year; it also predicted that it would raise rates more slowly in future years. Fed officials estimated the central bank’s benchmark rate would rise to 1.9 percent by the end of 2018, well below their prediction last September that the rate would reach 3.4 percent by 2018.
They continued to settle into a new view that growth would remain sluggish for the foreseeable future. Fed officials said they expected that economic growth would not exceed 2 percent over the next three years. They predicted that the unemployment rate would continue to fall a little, touching bottom at 4.5 percent in 2018, while inflation would rise to 2 percent by 2018 and stabilize at that level.
Given recent economic news, it’s not surprising that the Fed is continuing to hold off on raising interest rates. Economic growth as measured by Gross Domestic Product remains sluggish at best and forecasts for the coming year suggest that we can look forward to more of the same in the coming year. The remainder of the third quarter, as well as the fourth quarter, aren’t likely to be a time for the economy since many businesses are likely to be sitting on the sidelines awaiting the results of the Presidential election and some indication of what kind of policies can be expected out of whomever the 45th President of the United States will be before making any major decision are made. Given that both candidates are at least talking about the idea of major changes to tax laws, for example, it would be rather foolish for a business owner to make any major decision before having some indication of how it might be impacted by future policy. The jobs market isn’t much better, with less than 200,000 new jobs being created per month since the start of 2016, far below to completely deal with either the people still looking for viable full-time employment after falling victim to the Great Recession and the new people entering the workforce each month. Furthermore, the fact that we’re in the middle of a Presidential election makes it unlikely that the Fed will take any action until there’s some clue as to which direction future fiscal policy may go. Finally, the fact of the matter is that there simply isn’t any evidence of the kind of inflation or runaway economic growth that would make Federal Reserve action either presently or in the near future necessary suggests that the Fed shouldn’t act at the present time.
Unfortunately, as the statement released in conjunction with today’s decision would seem to make clear, the board is determined to raise rates at least once this year, the only question is a matter of when it will happen. Given that the next board meeting occurs less than a week prior to the election, it’s unlikely that they’ll do anything in November, so that suggests that, as we saw last year, the Board of Governors will use its December meeting to increase rates yet again. Like last time, this will likely be a modest, almost undetectable, increase that probably won’t have much of a noticeable impact for most people. Eventually though, these decisions will start having a real impact and the question will be whether the economy is strong enough to withstand the impact of the decision.