The Federal Reserve opted Thursday against the first rate hike in nine years, deciding to wait a bit longer because of soft readings on inflation and ongoing weakness in the global economy.
Rare is the event that makes news for something that didn’t happen. But financial markets for months have been expecting the Fed to begin lifting its benchmark lending rate, which would signal that a period of slowly increasing borrowing costs across the economy would follow.
The Fed has held its rate at near zero since December 2008. There hasn’t been a rate increase in nine years, well before the financial crisis of 2008.
A Fed statement said that it would begin raising its benchmark rate when there is “further improvement in the labor market” and when it is “reasonably confident” that inflation will reach its target rate of 2 percent.
Ongoing financial turmoil in China, which has roiled global markets, also seemed to have weighed on the Fed. The statement said a decision to raise rates, which now could come in December, depends on “readings of financial and international developments.”
At a news conference following the decision, Fed chair Janet Yellen made it clear that the U.S. economy continues to improve, especially the labor market. The Fed’s own updated forecast Thursday projects stronger growth this year than anticipated in June – 2.1 percent vs. 1.9 percent. It also foresaw a jobless rate of 5 percent this year, vs. the June estimate of 5.3 percent.
I think you have to do what’s right domestically.
Dean Croushore, chairman of economics department at the University of Richmond
Given the improving climate and job growth averaging 220,000 over the past three months, many analysts thought the Fed might begin raising rates Thursday. It was always viewed, however, as a close call.
“The Fed's inaction is not unexpected but still disappointing,” said Dean Croushore, a former Fed economist and chairman of the economics department at Virginia’s University of Richmond. “There is always a reason to chicken out. The Fed will lose credibility over time, as it fails to follow its own prior announcements about when it will increase rates.”
However, Yellen cited China concerns and “uncertainty abroad” and softer inflation rates for not increasing interest rates. She said net exports from the United States have been a “substantial drag” on the U.S. growth rate. A softening global economy and a strong U.S. dollar have made it harder for U.S. farmers and manufacturers to sell abroad.
“We want to take a little more time to evaluate the likely impacts on the United States,” said the Fed chair.
The dollar could grow even stronger if China’s woes deepen, and a stronger dollar means cheaper imports into the United States, which would subtract from growth. Falling import prices, along with falling energy prices, would push inflation even further from the 2 percent rate the Fed feels is ideal to keep the economy moving forward.
She said four of 18 Fed members whose views together make up the Fed’s forecast and interest-rate projection felt this week that no rate increase should happen this year. Only one, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented from Thursday’s statement. Lacker wanted a 0.25 percent increase in the benchmark rate.
Yellen said threats of a government shutdown and a renewed political battle over raising the nation’s debt ceiling did not weigh on the Fed’s decision.
“It played absolutely no role in our decision,” she said, adding that Congress has the responsibility to pass a budget and pay the bills the nation has already accumulated.
If either happen, she warned, “I think that would be more than unfortunate.”