The Federal Reserve announced Wednesday that it will remain “patient” in once again raising interest rates. The federal funds rate has been near zero for six years, and with the Fed’s third round of bond-buying, or QE3, now over, the big question everyone is asking about the Fed is when it will start to raise that rate back into more normal territory. Low interest rates are a way of stimulating the economy by encouraging borrowing.
Fed remaining “patient” on interest rate hikes
At the end of its latest two-day meeting, the Federal Open Market Committee said in a statement that it sees continued improvement in the job market and that low gas prices are allowing households to spend more. But inflation is also staying well below the Fed’s two-percent target, in part due to those low energy prices.
The Fed is supposed to aim for two things with its dual mandate: full employment and stable prices. And on those two things it's getting mixed signals. The number of jobs is showing solid growth, but inflation remains at around 1.5 percent, well below the two-percent threshold the committee is aiming for. Indeed, the December jobs figures showed strong payroll growth but a decline in wages, which may be a signal that considerable slack remains in the job market. Retail sales likewise slid in December, another potential sign that American workers aren't feeling a strong economic recovery just yet.
It doesn’t come as a surprise that the Federal Open Market Committee decided to maintain that language. The central bank first used the “patient” language in its December statement. At the press conference following that meeting, Chair Janet Yellen said the committee didn’t expect to start raising interest rates for “at least the next couple of meetings.”
Striking that balance creates a conundrum for Fed policymakers in deciding when to raise interest rates again: they wouldn’t want to remove the low-interest-rate stimulus if the economy still needs it. But should inflation start to pick up, they also won’t want to allow it to get too far above that 2-percent mark.
But for now, with inflation low and continued evidence of labor-market slack, there appears to be plenty of room for low rates — at least for now. For analysts, that means guessing how much room. June has been a popular guess for a “liftoff” date, as Reuters’ Michael Flaherty and Robert Schneider write, but Morgan Stanley, for example, is looking much further into the future, guessing that the central bank will start boosting interest rates in March 2016.
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