The Federal Reserve’s interest-rate-setters opted for caution when they voted not to raise rates at today’s meeting. On some measures, things look better than when the rate-setting committee last met in June. The committee’s median growth forecast for 2015 has risen from 1.9% to 2.1%. Unemployment has fallen faster than expected, to 5.1%. But with the inflation outlook weakening, the Fed chose not to rush into a rate rise. This was the right choice. But the longer the Fed holds off in the face of strong jobs data, the tougher its communication challenge will become.
Global economic weakness has brought down the Fed’s inflation forecasts. Commodity prices continue to fall, while the relative strength of the American economy means the dollar has strengthened, depressing the price of imports. Janet Yellen, the Fed’s chairman, thinks those trends will be transitory. On that basis, she says there is “an argument” to raise rates now, to get ahead of a pick-up in inflation once these supposedly one-off factors drop out the numbers. Indeed, Jeffrey Lacker of the Richmond Fed broke ranks to vote for a rate rise.
The Economist