The Federal Open Market Committee chose not to increase the federal funds rate this week, and instead held steady at virtually zero. While Janet Yellen, chair of the Federal Reserve Board, has been indicating interest rates would likely go up in the near term (interpreted by many as “during 2015”), the recent volatility in China combined with persistent low inflation meant Thursday’s announcement was not exactly a surprise for Fed watchers.
It seems the big story is really inflation — or rather, the lack thereof. Along with maximizing employment, the Fed has been targeting inflation of 2 percent as part of its dual mandate — low enough that it won’t do damage to the economy but high enough that it will encourage investment. But, as the Fed notes in its official statement:
“Inflation has continued to run below the committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.”
With oil prices low and wages flat, there just doesn’t seem to be any risk of a spike in inflation — at least, not in the Fed’s view. And, therefore, no need to raise interest rates to slay an inflationary dragon. So when will interest rates go up?
“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.”
That may not happen in 2015. Or it might. Predicting the Fed’s next move continues to remain the province of those with actual crystal balls.
Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.
Loretta Clodfelter is editor of Institutional Real Estate Americas.
