Washington – The Federal Reserve appears on track to raise interest rates later this year but signaled Wednesday that it wants to see further economic gains and higher inflation before doing so.
Subscribe to our Daily Roundup Email
A statement from the Fed after its latest policy meeting provided no timetable. Many analysts foresee the first hike in September, though Fed Chair Janet Yellen has stressed that any increase will be driven by the latest economic data.
The statement noted that the job market, housing and consumer spending have all improved. The Fed also expects inflation to rise gradually toward its 2 percent target.
In an upgraded view of the job market, the Fed now describes job growth as “solid” job growth. But it didn’t alter its outlook on inflation.
Yellen has left little doubt that the Fed is preparing to raise short-term rates by year’s end from the near-zero lows it set at the depths of the 2008 financial crisis. With the U.S. economy and job market now steadily rising, the need for ultra-low rates to stimulate growth is fading.
Earlier this month, Yellen told Congress that she thought the economy not only can tolerate but needs higher rates.
The economy still faces an array of threats, from subpar U.S. manufacturing and business investment to troubles in Europe and Asia, which have roiled financial markets. Inflation also remains below the Fed’s target rate. And while the unemployment rate, at 5.3 percent, is nearly normal, other gauges of the job market remain less than healthy. Pay growth remains generally sluggish, for example, and many people are working part time because they can’t find full-time jobs.
Yellen has stressed that when the Fed begins to raise rates, it will do so only gradually. The idea is to avoid weakening an economy that’s still benefiting from low borrowing rates resulting from the Fed’s policies. She has suggested that raising rates in small increments, followed by pauses, will let the Fed assess the effects of slightly higher borrowing costs.
The Fed has kept its key short-term rate at a record low near zero since 2008. Once it raises it, other rates — for mortgages, auto loans and corporate borrowing — could rise, too
Although the September meeting, when Yellen is set to hold a news conference, is seen as the most likely time for a rate increase, some analysts think the Fed might wait until December.
During Yellen’s testimony to Congress this month, some Democrats urged her to consider delaying a rate hike given that inflation remains below the Fed’s 2 percent target. The Fed has typically raised rates when it perceives a need to prevent inflation from getting out of control.
Part of the slowdown in inflation, though, reflects a plunge in oil prices over the past year, which will reverse itself once energy prices rebound.
The Fed is closer to achieving its other main goal: Maximizing employment. The unemployment rate is at a seven-year low, and over the past three months, U.S. hiring has averaged a robust 221,000 a month.
Economists who think the Fed will act in September point not only to low unemployment but also to signs of strength in such areas as housing and consumer spending. There’s also some concern that prolonged ultra-low rates may have begun to inflate dangerous bubbles in stocks, bonds or other assets.
Concern about igniting an overreaction in financial markets is a key reason economists think the Fed will show extreme caution in raising rates. Stocks and bonds suffered sharp declines in 2013 after the Fed initially mishandled its communications about when it would begin slowing a bond purchase program that was intended to keep long-term rates low.