Fed holds interest rates at current level, embraces ‘cautious approach’ on U.S. economic outlook

The Federal Open Market Committee on Wednesday voted to maintain the target range for the federal funds at 0.25% to 0.5% as the uncertain economic outlook has caused the monetary panel to embrace a “cautious approach” toward making gradual adjustments in U.S. fiscal policy.

In a statement following the two-day meeting, the FOMC said it 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. Noting that near-term risks to the economic outlook appear roughly balanced, the federal monetary panel said it will continue to closely monitor inflation indicators and global economic and financial developments before considering future rate hikes.

“Against this backdrop, the (FOMC) decided to maintain the target range for the federal funds rate at 0.25% to 0.5%,” the FOMC said in a statement. “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 explaining the federal policymakers’ decision, Federal Reserve Chair Janet Yellen said in an afternoon press conference that current policy is not “on a pre-set course.” Noting market concerns that the FOMC approach is rife with uncertainty, Yellen even posed and then answered a question that everyone is asking.

“So, why didn’t we raise the federal funds rates at today’s meeting?” Yellen asked rhetorically. “Our decision doesn’t reflect lack of confidence in the economy. The conditions of the labor market have strengthened and we expect that to continue. And while inflation remains low, we expect to rise toward our 2% objective over time. But with labor market slack taking off at a slower pace than in previous years, (and) scope for some further improvements in the labor market remaining and inflation continuing to run below our 2% target, we chose to wait for further evidence toward continued progress toward our objectives.”

Yellen also said the committee expects economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. She said interest rates are 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,” she said.

Three FOMC members split from the “Yellen Fed” to vote for a rate hike. Still, the split 7-3 vote, shows that more members of the federal monetary panel are now leaning toward gradually raising interest rates in the near-term, possibly at one of the two final 2016 meetings to be held in early November and mid-December.

Voting with Yellen on the FOMC monetary policy action were Fed Vice Chair William Dudley, Lael Brainard, James Bullard, Stanley Fischer, Jerome Powell; and Daniel Tarullo. Voting against the action were Esther George, Loretta 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%.

Earlier this month, Brainerd described the FOMC’s monetary policy as the “new normal,” saying she and other policymakers will continue to assess what policy will best promote the sustained attainment of the nation’s economic goals. Brainerd said the relationship between unemployment and inflation is no longer a reliable guidepost for monetary policy, a sentiment echoed by Yellen at Wednesday’s press conference.

In 2015, the FOMC waited until the lasting meeting of the year to announce a small rate hike from 0.25% to 0.5%. The move ended almost seven years of a near-zero percent rate and was the first rate hike in more than nine years. Yellen and other Fed members have since maintained an accommodative view on key interest rates, with an occasional attempt to challenge that policy in the six meetings between the last rate hike.

At the April meeting, George, president and CEO of the Federal Reserve Bank in Kansas City, decided to challenge the policy, saying she preferred to raise the target range for the federal funds rate to 0.5% to 0.75%. Nearly a year ago, St. Louis Fed President James Bullard appeared at a forum in Fort Smith promoting his vide that the Fed room to raise the interest rate because the U.S. economy is on better footing. Bullard has quieted that stance in recent months, saying the committee consider changes to the way it approaches the policy rate projections to better align market expectations of future policy moves.

Still, former Arkansas Tech University economist Marc Fusaro said he believes the Fed will raise interest rates before the end of the year.

“The timing is always tricky to predict. The Yellen Fed is very cautious,” said Fusaro, director of the Business and Economic Development Center at Emporia State University. “(They) are getting closer to that increase, but the numbers really give them cover if they do not want to raise them yet.”