By Daniel Krueger, a reporter for Bloomberg News
Janet Yellen would like you to believe she wants to raise interest rates. The labor and inflation numbers explain why she won’t.
When looking at the data, the most important things to consider are measures of how close officials are to achieving mandates on full employment and price stability. According to Fed projections, unemployment may fall as low as 4.4% in 2018. By that time, inflation may reach the 2% target.
That means the economy has spare capacity. By remaining on hold Yellen endorsed that view. While the FOMC doesn’t want output to overheat, the greater risk is tightening too soon will choke off growth in a still-tender economy.
The committee uses personal consumption expenditures to track inflation. It was at 0.8% in August, or 1.6% excluding food and energy. Inflation-indexed Treasuries suggest consumer prices rising an average 1.2% in the next five years.
“They’re waiting for inflation to pick up,” said Thomas di Galoma of Seaport Global, who doubts the Fed moves this year. “It’s not going to happen. There’s no reason to raise rates.”
With three Fed voters dissenting, favoring a rate increase, Donald Trump accusing her of keeping rates artificially low, and JPMorgan CEO Jamie Dimon saying an increase is overdue, Yellen is aware that pressure to raise rates is building.
And the statement may have given a nod to those in favor of a hike: “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
The mention of “time being” in the statement could be read as leaving December on the table. Two-year Treasury yields fluctuated after the decision and futures bet a hike by year-end is around 60%. The median forecast in the Fed’s dot plot is for an increase.
Whether that increase will happen by December depends on how much will change between now and then.