Fed puts brakes on drive to raise rates

The Federal Reserve announced Wednesday that it is not ready to raise interest rates, marking nearly seven years in which it has held short-term rates near zero.

The Fed’s statement, issued after a two-day meeting of its policymaking committee, left open the possibility that the Fed will raise rates at its final meeting of the year, in December. While noting that job growth has slowed, it said other economic indicators remained relatively strong.

The Fed also signaled that its concerns about the global economy have diminished. In the statement issued after its previous meeting in September, the Fed said global economic and financial developments might restrain domestic growth. That language was stripped from the new statement, leaving only an acknowledgment the Fed “is monitoring global economic and financial developments.”

After the Fed’s announcement, the stock market wobbled briefly but ended solidly higher.

The Dow Jones industrial average rose 198.09, or 1.13 percent, to 17,779.52. The Standard & Poor’s 500 index rose 24.46, or 1.18 percent, to 2,090.35. The Nasdaq composite rose 65.54, or 1.30 percent, to 5,095.69.

The decision to keep rates near zero was supported by nine of the 10 members of the Federal Open Market Committee. Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, once again dissented, as he did at the September meeting, arguing the Fed should start to raise rates now.

The Fed’s assessment of the domestic economy has remained relatively constant in recent months. The question is whether that pattern of relatively modest but steady growth will continue. The Fed appeared to tip its hat to this uncertainty in the statement, which said “economic activity has been expanding at a moderate pace,” rather than the present tense — “is expanding” — it had used in September.

But importantly, the statement also said that Fed officials are still confident in their forecast that the labor market will continue to improve and that inflation will eventually begin to rise. That forecast remains the Fed’s basic rationale for considering a rate hike in the near future.

The looming question now is whether the Fed will raise rates at its final meeting of the year, scheduled for Dec. 15 and 16. The Fed’s chairwoman, Janet Yellen, said in a late September speech that she still expected to raise rates this year, as long as economic growth continued. Stanley Fischer, the Fed’s vice chairman, said much the same a few weeks later.

The case for raising rates hinges in part on the Fed’s forecast that the economy will continue to add jobs at a healthy pace and that inflation will begin to rise more quickly. Fed officials also want to raise rates slowly, to minimize economic disruptions, and starting early could help.

Seeing signs of a slowing economy, investors are increasingly discounting the chances of a December rate increase, in part because of a widespread perception that the Fed continues to be too optimistic in its outlook.

Several crucial economic reports in the coming weeks could determine relatively quickly whether December remains a plausible option. The government is scheduled to release an initial estimate of third-quarter growth Thursday, followed next week by an even more important indicator, the estimate of October job growth. Any further signs of economic weakness could force the Fed to delay liftoff once again.

This story was originally published October 28, 2015 at 5:36 PM.