Coverage: Interest rates remain at zero

After months of speculation and debate, the Federal Reserve announced Thursday that it would not increase its key interest rate in September. But Fed Chairwoman Janet Yellen did not dismiss ideas that a rate hike might come in October.

Patrick Gillespie and Heather Long of CNN Money summed up the day’s news:

In a decision that could have gone either way, the Fed decided not to raise its key interest rate in September. America’s central bank hasn’t raised rates in almost a decade and rates have been stuck near zero since the depths of the financial crisis in December 2008.

Concerns about a global economic slowdown, low inflation in the U.S. and volatile stock markets lowered the chances of a September rate hike.

“The situation abroad bears close watching,” Fed chair Janet Yellen said at a press conference Thursday. “Heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets.”

The stock market surged after the decision with the Dow rising over 150 points, but then it fell back to flat as it appeared to sink in to investors that a rate increase is likely coming.

Although they didn’t raise rates now, the majority of Fed committee members believe there will be a rate hike in 2015, according to its economic projections. The committee has two remaining meetings this year — in October and December.

“Every meeting is a live meeting,” Yellen stressed. October “remains a possibility”

Overall, the Fed does sound slightly more optimistic about the U.S. economy. It raised its expectations for economic growth this year to 2.1% from 1.9%, and it lowered its projection for the unemployment rate by the end of the year to 5%. Currently, unemployment is 5.1%.

Nelson Schwartz of The New York Times showed how many analysts were unsurprised by the Fed’s decision but continue to be cautious that a rate hike might happen sooner rather than later:

“It felt like a dovish result with a dovish statement,” said Carl R. Tannenbaum, chief economist at Northern Trust in Chicago. “Before this meeting, there was a supposition that they’d set the table for a future move. I didn’t see any silverware in this announcement, and I think October is off the table.”

Still, other experts argued that the central bank is prepared to move as soon as global conditions improve, illustrating the uncertainty that will persist until at least the next Fed meeting in late October — or more likely until the last gathering of the year for policy makers in mid-December.

“The global deterioration has caught their attention and, clearly, that was the main factor,” said Michael Hanson, senior United States economist at Bank of America Merrill Lynch. “I don’t think this will keep them on hold for an extended period of time. Both the meetings in October and December remain live.”

Indeed, traders on Wall Street could not make up their minds Thursday on how to greet the Fed decision not to enact its first rate increase since 2006. After initially dropping after the 2 p.m. announcement, stocks quickly rallied by more than 1 percent, only to fall in the final hour of trading. Major market indexes finished the day down by about 0.25 percent.

Several analysts said they were struck by the second paragraph in the Fed’s statement, in particular the conclusion that global volatility and economic events “are likely to put further downward pressure on inflation in the near term.”

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said those conclusions constituted the major news in Thursday’s announcement.

“I’m not surprised they didn’t move, but I am slightly surprised that they were so explicit with their reasoning,” he said. “The new stuff is the recent financial global developments, and for now they are kind of paralyzed.”

The Wall Street Journal’s Jon Hilsenrath discussed potential troubles for the Federal Reserve moving ahead as it waits to raise rates:

After a series of unanimous policy votes this year, Thursday’s vote was 9-1. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, calling for a rate increase now.

The dissent underscored divisions that are building inside the central bank about how to proceed. Six officials submitted projections before the meeting that called for two interest-rate increases this year, which suggests Mr. Lacker has backing for the call to start moving. Not all of the 17 Fed bank president and board governors who attend the meeting actually vote for the decision, which explains why only one dissented while others want to start.

Fed officials have several worries at the moment. Growth in China has slowed and might be on a softer path than expected. Ms. Yellen appeared to let slip an unusual knock on how Chinese officials are handling the slowdown in the world’s second largest economy.

“Developments that we saw in financial markets in August, in part, reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the deftness in which policy makers were addressing those concerns,” she said.

Another worry is the strength of the U.S. dollar, which has appreciated 8% against a broad basket of other currencies this year. The stronger currency puts downward pressure on exports and import prices, movements at odds with the Fed efforts to spur economic growth and raise currently low inflation.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term,” the Fed said in the official policy statement released by the central bank after the meeting. It added that it was “monitoring developments abroad,” a signal of the Fed’s heightened state of worry that slow growth outside the U.S. could hurt the American economy.

Fed officials have been signaling for months they plan to raise rates this year. Central to their optimism is a view labor markets are improving rapidly and reducing slack in the economy, a precursor to some lift in inflation.

“On balance, labor market indicators show that underutilization of labor resources has diminished since early this year,” the Fed said in its policy statement.

Before the meeting, investors had come to believe the Fed wouldn’t move. In futures markets before the meeting, traders attached a 27% probability to a rate increase Thursday, but a 64% probability to an increase by December, according to calculations made by the Chicago Mercantile Exchange. After the meeting they saw a 45% probability of a move by December.

The Washingon Post’s Ylan Mui discussed the Fed upgrading economic expectations for the year:

The Fed modestly upgraded Thursday its expectation for economic growth this year from 1.9 percent to 2.1 percent, but the forecast is still lower than the robust expansion enjoyed a decade ago. The jobless rate has already fallen below the central bank’s June estimate of 5.3 percent. The Fed adjusted its forecast to 5 percent. It also nudged up its estimate of core inflation from 1.3 percent to 1.4 percent.

In May, Yellen said speech that she expected the economy would be strong enough to raise the target rate by the end of the year. Other top Fed officials had signaled the long-awaited move could come during its meeting this month.

But that was before the jaw-dropping swings in financial markets over the past few weeks, including a 1,000-point plunge in the Dow Jones industrial average. Evidence is mounting that China’s breakneck economic growth is fizzling out faster than previously thought.

In the meantime, the strong U.S. dollar and low oil prices are weighing on inflation, which has run below the Fed’s target of 2 percent for years. The World Bank, the International Monetary Fund, Nobel-laureate Joseph Stiglitz and former Treasury Secretary Lawrence Summers have all called on the central bank to hold off on a rate hike, at least for now.

“Now is the time for the Fed to do what is often hardest for policymakers,” Summers wrote in The Washington Post recently. “Stand still.”

The calls for delay are also coming from a populist campaign known as Fed Up, which protested outside of the central bank’s buildings Thursday. Several lawmakers joined the demonstration, including Michigan Rep. John Conyers, who is sponsoring a bill that would require the Fed to target a 4 percent unemployment rate.