The Fed Keeps Interest Rates Near Zero

Fed Interest Rates

The Federal Reserve decided Thursday to once again delay an interest rate increase, with Chairwoman Janet Yellen pointing to “heightened uncertainties abroad.”

Speculation has increased over recent months that the Fed would finally achieve “liftoff” this week, increasing rates for the first time in almost a decade amid signs of a strengthening American economy. But while unemployment has dropped to 5.1% in the most recent monthly report, turmoil in China’s markets along with sluggish inflation rates in the U.S. have spooked many analysts.

In a statement, the Federal Open Market Committee said it “anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Only one FOMC official, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond (Virginia), voted to increase rates.

The Fed still see growth in the American economy and improving labor conditions, but stagnant wages have kept the inflation rate far lower than the target of 2%. That, along with concerns in China and Europe, seems to have convinced Fed officials that a rate increase now would be poorly timed and possibly counterproductive.

But there is also concern that a rate increase could be delayed too long.

“We don’t want to wait until we’ve fully met both of our objectives to tighten monetary policy,” Yellen told reporters Thursday.

Even once those employment and inflation objectives are met, though, the FOMC warned that “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The Fed has maintained a near-zero interest rate since the economic collapse of 2008, but there seems to be a consensus that the time is right for a rate increase. Only those short-term concerns in China and with the U.S. price level  are holding officials back.

“The recovery from the Great Recession has advanced sufficiently far and domestic spending has been sufficiently robust that an argument can be made for a rise in interest rates at this time,” Yellen said Thursday.

Fed officials also projected that the unemployment rate would drop further next year, to around 4.8%.