The improved tenor of the central bank's statement suggests officials are gaining confidence that the nation’s economy has pulled through recent turmoil relatively unscathed. Britain’s surprise decision to abandon the European Union had roiled international financial markets and upended the country’s political leadership. Policymakers around the world are closely watching the fallout, though the extent of any damage will not be clear for years.
At the Fed, concern over the referendum in Britain was a key reason officials voted not to raise rates at their meeting in June. Analysts had widely expected the central bank to remain on hold Wednesday as well to give officials time to analyze the repercussions. The Fed's policy-setting committee approved the decision 9-1, with Kansas City Fed President Esther George the sole dissenter, favoring a rate increase. But the central bank's acknowledgment that global risks are fading suggests it could be inching in that direction as well.
The Fed raised its benchmark overnight lending rate in December for the first time since slashing it to zero during the depths of the 2008 financial crisis. The increase was just one-quarter of 1 percent, but it was a critical step toward ending an unprecedented era of central bank stimulus.
Yet the Fed has yet to raise rates again, derailed by a volley of blows from overseas. Fears of a slowdown in China sent markets into a tailspin over the winter. A soaring U.S. dollar and plunging oil prices have kept a lid on inflation and dampened appetite for American exports. And now Europe is confronting slower growth and years of uncertainty following the vote in Britain.
Policymakers there have also taken a cautious approach. The Bank of England held its benchmark rate steady this month, but analysts believe the central bank will lower it in early August amid signs that growth in the island nation is weakening. Likewise, the European Central Bank held its fire last week but offered assurances that it possesses the “readiness, willingness and ability” to boost its already massive stimulus program.
The Fed will meet again in mid-September, after central bankers in England and Europe decide their next steps. Ahead of the Fed’s announcement Wednesday, investors assigned a 20 percent chance that the central bank would raise rates then. Odds were roughly even for a move in December, its final meeting of the year.
In addition, the Fed has lowered its estimate of how high interest rates are likely to rise, from more than 4 percent in 2012 to just 3 percent in its most recent projections. As a result, officials can move even more gradually than previously anticipated. The central bank has repeatedly emphasized that the pace of rate hikes will depend on the health of the economy. If it picks up speed, the Fed could raise rates more quickly. And if it slows down, officials would adjust correspondingly.
“As has been the case during much of the recovery from the Great Recession, there will be nothing normal about this process of normalization,” said David Stockton, senior fellow at the Peterson Institute for International Economics.