I expected Fed’s decision to leave interest rates as-is:
- There have been at best only limited signs of inflation. By contrast, there have in the last year been deflationary periods in the consumer price index.
- Inflation is easy to control (raise interest rates). Deflation is very difficult to control (you can’t cut rates to zero or below, because banks make money by lending money at a higher rate than they pay savers, which means a negative rate on deposits, which savers can beat by stuffing their money in a mattress and earning 0% interest). So rulers of any sort, central bankers included, tend to be more willing to risk inflation than deflation; it’s one of the reasons they never target zero inflation. Instead, they target a low inflation rate, just to err on the safe side of not having deflation.
- Some inflation is actually a good thing, as by making money lose value over time it punishes people who would stuff their money in a mattress as opposed to investing it in the economy, thus encouraging investment.
- Recent signs the bubble in China might be ready to pop. The Fed doesn’t want to be the straw that broke the camel’s back and caused a severe recession.
That final one provides a key to their near-term plans. The Fed is doubtless waiting to see if the China jitters blow over before making any decision on a rate hike.
They don’t want to flatly admit it, of course, because that would be admitting the problems in China are real and serious (as they are) which might itself provoke a recession. But they alluded to it by burying a revealing phrase in their press release:
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments [emphasis added]. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
And if the Associated Press’s economic pundits are correct, this is in itself somewhat unusual (and thus particularly revealing):
It’s extremely rare for Fed officials in their statement to highlight the risks posed by foreign economies. This means that they’re carefully monitoring the aftershocks from a slowdown in China and other emerging markets, in addition to struggles by Europe to increase economic growth.