The Federal Reserve reiterated on Wednesday, Jan. 28 that it will be “patient” in raising rates from the record lows, but noted that inflation remains below its target, despite the improving US economy.
In a statement after its latest policy meeting, the Fed made clear that no rate increase is imminent. The action was approved on a unanimous 10-0 vote. Chair Janet Yellen said after last month’s meeting that by saying it would be “patient,” the Fed was indicating there would be no rate increase for at least two more meetings.
The Fed’s statement Wednesday said the factors holding inflation below its 2 percent target rate have built up since their last meeting in December. Inflation has generally stayed low, partly because of a plunge in energy prices and a steadily strengthening dollar.
The central bank said it thinks inflation will decline further before starting to rise gradually. The bank has brought up concerns about weak price gains, which could delay any rate hikes.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, two of the most vocal officials who have urged the board to move more quickly to raise inflation rates, are not voting members of the policy panel this year.
The Fed’s main goals are to keep prices rising at a moderate pace (2 percent) while promoting maximum employment.
The Fed’s statement strengthened its assessment about how the US economy is performing, saying that the expansion was “occurring at a solid pace,” which is an improvement from the “moderate pace” wording it had used since September. It also upgraded its description of job gains to “strong” from “solid” last month, adding that the plunge in oil prices had “boosted household purchasing power.”
Though the Fed did not explicitly mention the slowing global economy, it did mention plans to take “international developments” into account in determining when to start raising interest rates.
In its discussion of prices, it said that inflation has “declined further” below the committee’s 2 percent target, and said this slowing was largely a reflection of falling energy prices. Inflation could slow even further in the near term, before rising gradually toward the Fed’s preferred 2 percent pace.
Many economists have forecast a Fed rate increase in June, though some have pushed back that timetable recently, some even to early 2016 because of factors holding inflation down.
“The change in wording on inflation is significant,” said chief economist David Jones at DMJ Advisors. “Given their concern about inflation being as low as it is, it is more of a question of a hike at mid-year or the third quarter rather than one coming any earlier than that.”
he US economy’s steady growth and a strengthening job market would normally argue for a move to begin raising rates to prevent high inflation. The Fed has kept its benchmark rate near zero since December 2008 to encourage more borrowing, spending and investment in order to support economic recovery. The key rate affects rates on many consumer and business loans.
However, concerns about global economic weakness and low inflation have raised doubts about when the Fed’s first rate increase will occur.
Recovering from the recent recession, the US economy so far has added nearly 3 million jobs last year, cutting the unemployment rate to 5.6 percent—which is just above the Fed’s goal of 5.2 to 5.5 percent unemployment in the nation.
Still, Fed officials have pointed to factors such as weak pay growth and a still-high number of those who can’t find full-time jobs, as evidence that more must be done to achieve a healthy job market.
US prices rose just 1.2 percent in the 12 months that ended November, according to a gauge of inflation. When inflation is too low, consumer spending and economic growth can slow as people delay their purchases on the assumption that the same or lower prices will be available later.
(With reports from Associated Press)
