Yellen says it was a close call; boost still expected this year
WASHINGTON – One of the longest economic expansions in American history remains so fragile that the Federal Reserve said Thursday it would postpone any retreat from its stimulus campaign.
Janet Yellen, the Fed's chairwoman, described the decision as a close call and said the central bank still expected to raise interest rates later this year. The Fed has kept its benchmark interest rate close to zero since late 2008, when the nation's economy was at the depths of crisis.
"The recovery from the Great Recession has advanced sufficiently far and domestic spending has been sufficiently robust that an argument can be made for a rise in interest rates at this time," Yellen said at a news conference.
But, she said, "heightened uncertainties abroad," including Chinese economy's weakness, had persuaded the bank to wait at least a few more weeks for fresh data that might "bolster its confidence" in continued growth.
The Fed's decision, announced after a two-day meeting of its policymaking committee, had been widely expected by investors in recent weeks.
Fed officials spent most of the summer suggesting that they wanted to raise rates in September, only to lose confidence as signs of slowing global growth weighed on markets.
The 10-year Treasury note yield fell 0.11 percentage points to 2.189 percent. The Standard & Poor's 500 stock index dropped 0.26 percent to 1,990.20.
There were signs, however, that the Fed might hesitate only briefly. It separately released economic projections showing 13 of the 17 officials on the Federal Open Market Committee still expected to raise the benchmark rate this year.
The Fed has said it is moving toward raising rates because it expects economic growth to continue, reducing unemployment and eventually raising inflation; on Thursday, Yellen said that outlook had not changed.
"There's a tendency among some to think that they're always going to get cold feet, and I thought Yellen really as much as possible discouraged that kind of thinking," said John L. Bellows, a portfolio manager at Western Asset Management.
The policymaking committee still has scheduled meetings in October and December, and Yellen said a rate increase was possible at either meeting.
One official, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, in Virginia, voted to raise rates at the September meeting, the first dissent this year. The economic projections suggest that Yellen faces more disagreements at the Fed's October meeting, given that six officials predicted the Fed would raise rates at least two times this year, while four said that they expected no increases.
The latest postponement was welcomed by liberal activists and economists who argue that the recovery remains incomplete. Rep. John Conyers Jr., D-Mich., introduced legislation on Thursday directing the Fed to push the unemployment rate below 4 percent. While the bill has no chance of winning approval in the Republican-controlled Congress, Conyers addressed a rally organized by the Center for Popular Democracy outside an office building where Yellen spoke, joining in a chant of "Don't raise interest rates."
The Fed's decision is probably a "mixed blessing" for the global economy," Eswar S. Prasad, an economics professor at Cornell, said in an e-mail. Instead of new pressures, investors must deal with continued uncertainty.
A Fed increase, for example, might have prompted investors to pull money out of countries like Turkey or Brazil, damaging their economies, and reduced demand for imports from Europe and other developed countries. But the decision to stand pat also could weigh on Europe in the short term if it causes the euro to rise against the dollar, making things harder for exporters.
The U.S. economy is outpacing the rest of the world, and Yellen said Thursday that the Fed did not yet see evidence that growth was slowing.
Fed officials say they believe that labor market conditions have nearly returned to normal. In the new round of economic projections, officials estimated unemployment would stabilize next year at 4.8 percent, just below the August level of 5.1 percent.
Officials also remain confident that inflation will rebound, although perhaps a little slowly thanks to the recent downturn in the prices of oil and other commodities. Since the financial crisis, inflation has remained below the central bank's 2 percent annual target, lately rising just 0.3 percent over the previous year.
Given the weakness of economic growth, however, Yellen reiterated on Thursday that the Fed planned to raise rates more slowly than its past practice. Fed officials expect the benchmark rate to reach 2.6 percent by the end of 2017.
The Fed has already held its benchmark rate near zero much longer than it once expected. Some officials have made clear they are not inclined to wait much longer.
Stanley Fischer, vice chairman of the Federal Reserve, warned in late August that officials would not be able to postpone a decision until all doubts were resolved. "When the case is overwhelming," he said, "if you wait that long, then you've waited too long."
Yellen echoed that warning on Thursday. "We don't want to wait until we've fully met both of our objectives to tighten monetary policy," she said.