Timothy Hopper, Ph.D., Managing Director, Chief Economist, TIAA-CREF
The U.S. Federal Reserve today announced that it is holding short-term interest rates steady, maintaining the near-zero interest-rate policy it adopted in December 2008 to help spur the economy out of the Great Recession.
We had been anticipating a rate hike of 25 basis points (+0.25%), based on our view that the U.S. economy is on strong enough footing to take the first step toward normalizing interest rates after nearly a decade of extraordinarily easy monetary policy. Fed Chair Janet Yellen acknowledged that an argument could be made for raising rates now, based on the strength of labor markets and how far the economy has progressed since the end of the Great Recession.
However, in deciding to keep the target federal funds rate in a range of 0%-0.25%, Yellen emphasized that inflation measures have softened, driven by falling energy and import prices in the face of a still strengthening dollar. Also notable were Yellen’s references to recent global developments (such as China’s slowdown) and their potential impact on the U.S. economy. This language was a departure for the Fed, which historically has focused on domestic economic issues to guide its policy decision-making.
From our perspective, a decision to raise rates now would have been a positive step for the markets and the economy, removing a cloud of uncertainty that has prevailed for months. In the absence of a rate hike today, uncertainty—and market volatility—are likely to continue in the near term. We still believe the Fed will move to raise rates this year, but most likely not before December. The key will be whether we see measurable increases in inflation statistics between now and then.