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Fed holds rates, paves the way for a December hike

The Federal Reserve once again pushed back plans to raise interest rates on Wednesday, a widely expected move following a series of mixed economic reports and varied signals from Fed officials.

After its two-day policy meeting, the Federal Open Market Committee voted to hold the federal funds rate between 0.25% and 0.50%, citing progress in economic and labor market growth and an improving risk outlook.

“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 central bank wrote in its statement.

It’s worth noting, however, that three members of the committee — Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren — voted against the decision, preferring to raise the federal funds rate to 0.50% to 0.75% at this meeting.

“The highly-unusual 7-3 FOMC vote speaks to the complexity facing the Fed operating in a prolonged period of highly unbalanced policy mix,” Allianz’s Mohamed El-Erian said.

For the first time this year, the Fed noted that “near-term risks to the economic outlook appear roughly balanced.” The reintroduction of the balance of risks statement, a sentence the Fed included in nearly all of its 2015 press releases, is a step some analysts consider a necessary precursor to a rate increase.

The Fed’s cautious, yet generally positive, economic statement follows a slew of mixed data in August, including weak retail sales, soft ISM manufacturing and services readings, and slower-than-expected hiring. The unemployment rate has hovered around 5% for the past year—a level many economists consider to be near full employment. However, output growth has been less than impressive. Real GDP is now estimated to have increased only 1.1% in the second quarter.

“[G]rowth of economic activity has picked up from the modest pace seen in the first half of the year,” the Fed wrote in its statement. “Although the unemployment rate is little changed in recent months, job gains have been solid on average.”

Meanwhile, inflation, which has run below the Fed’s 2% target for years, has started to show signs of improvement. The personal consumption expenditures index, the Fed’s preferred measure of price inflation, increased 0.8% in July from the year before, as core inflation rose 1.6%. Another measure of inflation, the core reading of the Consumer Price Index, rose 2.3% year-over-year in August. However, the Fed sees inflation remaining “low in the near term.”

Fed projections and dot plots

The Fed’s expectations for short-term and long-term GDP growth dropped to 1.8% from 2%, while forecasts for unemployment remained mostly unchanged, with officials expecting the rate to fall to 4.6% by 2019. The outlook for core inflation decreased to 1.8% by 2017.

Fed officials’ projections for the federal funds rate dropped, indicating one quarter-point increase this year, rather than the two hikes envisioned in June. Shortly after the Fed began raising rates last year—for the first time in over a decade—turmoil in US markets and uncertainty abroad convinced many officials to delay further rate increases.

Long run expectations for the fed funds rate also declined to 2.9% from the 3.0% forecasted in June.


Below is full text of the Fed’s announcement:

Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. 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 stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.