The Federal Reserve left short-term interest rates unchanged Wednesday after a meeting marked by internal divisions, but signaled it still expected to raise them before year-end.
Its stance underscored the lack of urgency the U.S. central bank’s leadership feels about lifting rates when inflation is lingering below its 2% goal and the unemployment rate is holding steady at a low level just under 5%.
It also showed the challenge faced by Fed Chairwoman Janet Yellen, who is trying to balance divergent views inside the Fed about how to proceed. One camp of policy makers wants to move rates up right away while another sees no need to raise rates at all this year.
“We judged that the case for an increase had strengthened but decided for the time being to wait for continued progress toward our objectives, ” Ms. Yellen said in her press conference following the meeting.
Disagreements over timing drove three regional bank presidents — Esther George, Loretta Mester and Eric Rosengren — to dissent because they wanted to move rates up at the September meeting, a rare challenge to Ms. Yellen’s leadership.
Forecasts released by the Fed showed 10 of 17 officials expected to raise the central bank’s benchmark federal-funds interest rate — an overnight interbank lending rate — by a quarter percentage point by December, to a range between 0.5% and 0.75%. Three officials don’t see a move at all this year. However, four wanted more than one rate increase, a divergence that reflects the broader divisions inside the central bank about how to proceed.
While it displayed patience about moving rates, the Fed’s description of the economy was generally upbeat.
Fed officials have become less worried about risks to the economic outlook, a potential opening to raising rates before year-end. Officials had grown concerned about a range of global problems earlier in the year, including Britain’s decision to exit from the European Union and China’s uncertain economic outlook. In its postmeeting policy statement, the Fed said risks had become “roughly balanced,” meaning the economy has just as good a chance of exceeding the Fed’s growth estimates as of falling short.
This risk assessment is often a clue about whether the Fed expects to move rates in the months ahead. When officials see risks that worry them, they aren’t inclined to move rates up.
Ms. Yellen noted that the unemployment rate has held steady at or near 4.9% since the beginning of the year even though employers have added about 180,000 jobs a month this year. That means potential workers are coming off the sidelines, suggesting there remains some slack in the labor market.
Policy makers judged it made sense to postpone the next rate increase to absorb some of the remaining slack, Ms. Yellen said.
“We found the economy has a bit more running room,” she said. “Nevertheless, we don’t want the economy to overheat, and if things continue on the current course, I think some gradual increase will be appropriate.”
The Fed’s next policy meeting, Nov. 1-2, is a week before the U.S. presidential election, and action is unlikely then, leaving a mid-December policy meeting as the Fed’s last scheduled chance this year to push rates higher.
The Fed’s broader message Wednesday was that it was doubling down on its promise to lift borrowing costs very gradually.
The median of officials’ projections showed they expected to raise the benchmark rate, likely in quarter-percentage-point steps, two more times in 2017, to between 1% and 1.25%, then three times in 2018 to between 1.75% and 2%, and three times in 2019 to between 2.5% and 2.75%.
That marks a shallower path of rate rises than the Fed projected in June, when they forecast two increases in 2016, three in 2017 and three more in 2018. A year ago, the Fed expected to move rates up four times in 2016, but has held the fed-funds rate steady since December in a range between 0.25% and 0.5%.
The policy statement borrowed from a speech given by Ms. Yellen at the Kansas City Fed’s conference in Jackson Hole, Wyo., in August, when she said the case for a rate increase had strengthened. But she also stressed at the time the uncertainty surrounding the Fed’s forecast, a nod to arguments that the U.S. is vulnerable to unexpected turbulence abroad.
U.S. economic growth was disappointing in the first half of the year. Output expanded at an annual rate of just 0.8% in the first quarter and 1.1% in the second.
The Fed said the economy picked up from a modest pace more recently. However, recent data have been mixed. Industrial production and retail sales declined in August, reflecting weak demand for manufactured goods and skittishness among consumers.
Almost 74% of economists surveyed by The Wall Street Journal earlier this month said the Fed’s next interest-rate increase would come in December.
Several Fed officials have lowered expectations for how high they might raise rates over time because of fundamental changes in the global economy.
Aging populations, slower productivity growth and the rise of wealthier emerging markets looking to invest their savings have triggered broad shifts. As a result, officials believe the natural interest rate — the inflation-adjusted interest rate at which inflation and employment stabilize — will remain lower than it has been in the past. Economic growth and inflation likewise would grow more slowly.
That means the Fed has less work to do raising rates over the next few years. It also gives officials less room to cut them in a financial crisis or another economic downturn.