The Federal Reserve tiptoed ever closer on Wednesday to a decision to raise interest rates but ultimately decided to stand fast, despite expressing growing faith in the health of the U.S. economy and in the case for a rate hike.
The decision, immediately dubbed a "hawkish hold" by Fed watchers, leaves the Fed preparing to make a single move to raise rates before the end of the year. Fed Chair Janet L. Yellen explained it simply: The nation's central bank, she said, thinks the labor market still has the potential to pull more would-be workers back into the job market, and inflation continues to run below the Fed's target rate.
“We’re generally pleased with how the U.S. economy is doing,” Yellen said in a news conference after the conclusion of the Federal Open Market Committee's two-day meeting in Washington. “The economy has a little more room to run than might have been previously thought.”
The normally even-keeled Yellen grew animated during the news conference as she responded to repeated questions about Republican presidential nominee Donald Trump's recent allegations that the nation's independent bank has been keeping rates "artificially low" to aid the Obama administration and Democratic nominee Hillary Clinton.
“I can say emphatically that partisan politics play no role in our decisions about the appropriate stance of monetary policy," Yellen said. Later, she added: “The Federal Reserve is not politically compromised. We do not discuss politics in our meetings.”
The news conference and committee decision that preceded it sent signals that a rate increase is just around the corner. In terms that were stronger than many economists expected, the Fed declared in a statement that the case for a hike "has strengthened" but that it would wait "for further evidence of continued progress" toward higher growth and faster inflation.
That language suggests the Fed thinks the U.S. economy has sailed safely through headwinds that worried officials earlier this year, including possible damage from Britain's vote to exit the European Union.
Highlighting a growing split on the committee, three Fed presidents dissented from the decision: Esther George of the Kansas City Fed, Loretta Mester of the Cleveland Fed and Eric Rosengren of the Boston Fed. All of them favored an immediate move to raise rates. At the last policy meeting in July, only George broke from the decision to hold rates just above zero.
Fed officials also indicated they still expect interest rates to rise by year's end, though not as quickly as they anticipated. They now expect rates to hit 1.1 percent at the end of 2017, down from a June forecast of 1.6 percent. The outlook for the end of 2018 also fell by a half-point, to 1.9 percent from 2.4 percent.
Markets and Fed-watching economists largely anticipated Wednesday's move after Yellen and other top officials at the nation's central bank sent strong hints in recent speeches that rates were unlikely to budge this month. Markets rose higher after the release of the Fed statement, with all three major indexes closing up by about 1 percent.
The decision leaves open the question of whether the committee might raise rates when it next meets, Nov. 1 and 2, just before the U.S. presidential election. Many Fed watchers expected no rate increases until December. Some read Wednesday's decision as a central bank anxious to act soon. "The FOMC clearly signaled a hike before the end of the year," economists for Bank of America Merrill Lynch Global Research wrote in a release.
Board members on Wednesday also issued updated forecasts for growth and inflation, which were little changed from June. The median forecaster on the board now expects the U.S. economy to grow 1.8 percent this year, down from 2 percent in June, and the unemployment rate to finish the year at 4.8 percent.
Inflation for the year is now expected to register at 1.3 percent, down slightly from June's projections and still well short of the Fed's 2 percent inflation target. Core inflation, which excludes more volatile prices such as energy, is expected to hit 1.7 percent for this year.
In her news conference, Yellen downplayed the dissents from the three regional presidents. “There is less disagreement in the committee than you might think listening to some speeches and commentary,” she said. She also swatted away questions about the presidential election, insisting that a committee that had warned of economic impacts from the Brexit vote in June was not considering any possible effects on growth from the American presidential election.
Yellen even declined to answer a question about whether tariffs levied against American trading partners — a proposal Trump has raised during the campaign — would affect the economic outlook.
“That’s a political issue," she said. "I’m going to pass on that one.”