Fed signals it could raise interest rates by midyear
WASHINGTON — The U.S. Federal Reserve signaled Wednesday that it would consider raising its benchmark interest rate at its June meeting, the first increase since the Great Recession, but the central bank emphasized that it might still delay the decision until later this year.
The Fed’s announcement, in a statement issued after a two-day meeting of its policymaking committee, moved the central bank to the verge of ending a period of more than six years in which it has held short-term interest rates near zero.
The march toward higher rates reflects both the Fed’s optimism that the economy no longer needs quite as much help from the central bank and a sense of fatigue about its long-running campaign to encourage faster economic growth.
Unemployment remains above its normal levels in a healthy economy, and the Fed acknowledged in its statement that inflation has sagged even further below the 2 percent annual pace it regards as most desirable. It also said growth has “moderated somewhat.”
Yet the statement did not reiterate the Fed’s recent promise to remain “patient” in deciding when to start raising rates. Instead, it said the Fed would act “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
The statement said the Fed “remains unlikely” to act at its next meeting, in April, turning the attention of investors to the meeting after that, in June.
The Fed’s chairwoman, Janet L. Yellen, received unanimous support for the decision from the other nine voting members of the Federal Open Market Committee.
While officials continue to anticipate a rate hike in the coming months, the average prediction of the 17 officials who participate in policy decisions is that the Fed’s benchmark rate would only reach about 0.75 percent by the end of the year. The average predicted rate by the end of 2016 was still just 2 percent, according to quarterly forecasts the Fed released with its policy statement Wednesday.
The Fed has pointed steadily toward its initial rate increase in the summer of 2015 for the last few years, a consistency that reflects the economy’s steady-but-slow recovery over the same period. Yet as the time approaches, the recovery remains incomplete: Good jobs are still hard to find, while inflation has been persistently sluggish.
Employers have added more than 3 million jobs over the last year, yet wages have increased only modestly.
And some analysts have cut forecasts for firstquarter growth after underwhelming reports on consumer spending and manufacturing. There are also growing concerns that the stronger dollar, which has been rising in part on expectations that the Fed will raise rates while other central banks are cutting them, will hurt U.S. exports and cut into corporate investment.
Some liberal politicians and activists have expressed fears that the Fed may begin to raise interest rates prematurely.
They note that the Fed in recent decades has repeatedly used economic downturns to reduce inflation, often at the expense of tolerating higher unemployment.
This time, they argue that the Fed should wait to raise rates until it sees evidence that inflation is climbing back toward 2 percent.
Republicans in Congress, on the other hand, are frustrated that the Fed has not started to raise rates. They have proposed measures that would impose greater congressional oversight on the conduct of monetary policy, including a requirement that the Fed publicly articulate the framework it uses for setting interest rates.
Alongside the debate about the timing, there is widespread concern that whenever the Fed moves, raising rates will disrupt financial markets. The Fed is likely to be the first ma- jor central bank to start raising interest rates, and it is also intentionally introducing greater uncertainty into the process. Fed officials say it is time to end the practice of providing explicit guidance about its plans for interest rates.
Christine Lagarde, the head of the International Monetary Fund, warned Tuesday in a speech in India that the resulting turbulence could be bad for emerging markets.
“The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed,” she said.
The hedge fund manager Ray Dalio wrote in a note to clients last week that if the Fed does tighten too soon, it would have little ability to correct the mistake because it has already exhausted the standard arsenal of monetary policy.
He compared the decision facing the Fed to its premature and disastrous interest rate increases in 1937.
“We don’t know — nor does the Fed know — exactly how much tightening will knock over the apple cart,” Dalio said in the note, which made the rounds on Wall Street because of his prominence and its unusually foreboding tone.
“What we do hope the Fed knows, which we don’t know, is how exactly it will fix things if it knocks it over.”