Fed Signals No Hurry to Raise 1nterest Rates

Janet L. Yellen, the Federal Reserve chairwoman, arrives for a news conference on Wednesday. By BINYAMIN APPELBAUM September 17, 2014

WASHINGTON — The Federal Reserve stuck with its commitment to its stimulus campaign Wednesday, rejecting the argument it should begin to pull back more quickly, even as it detailed plans for an eventual increase in interest rates.

The Fed, in a statement released after a two-day meeting of its policy-making committee, said that the economy continued to improve, but that the central bank's help is still needed.

"There are still too many people who want jobs but cannot find them, too many who are working part time but would prefer full-time work, and too many who are not searching for a job but would be if the labor market were stronger," the Fed's chairwoman, Janet L. Yellen, said at a news conference Wednesday.

The Fed said it would continue to wind down its bond-buying campaign, adding just $15 billion to its holdings of Treasury and mortgage-backed securities next month. But it added that it planned to continue the centerpiece of its campaign, holding short-term interest rates near zero, for a "considerable time," maintaining language it has used before in describing its strategy.

Graphic | Fed Remains CautiousThe Federal Reserves economic forecasts of gross domestic product (G.D.P.), unemployment rate, inflation and the share of the fed officials who think they will begin raising rates next year.

Fed officials also downgraded their expectations for economic growth in 2015 in forecasts published at the same time as the policy statement. Officials now expect the economy to grow between 2.6 percent and 3.0 percent next year, compared to June forecasts for growth between 3.0 percent and 3.2 percent.

"On balance, labor market conditions improved somewhat further," the Federal Open Market Committee said in its statement. "However, the unemployment rate is little changed and a range of labor market indicators suggest that there remains significant underutilization of labor resources."

There were two dissenting votes. Both Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas, argued that economic conditions had improved sufficiently for the Fed to signal that it could begin to retreat more quickly.

Fed officials are increasingly in agreement that the central bank will begin to raise short-term interest rates next year, according to individual forecasts by the 17 members of the policy-making committee that the Fed published Wednesday. Only two officials predicted rates would remain near zero until 2016.

The forecasts showed relatively little change in the level officials expect interest rates to reach by the end of 2015, although comparisons were muddled by a change in methodology, and in the committee's membership.

The Fed also published Wednesday a description of the plans for its eventual retreat, including some expected changes in the mechanics of monetary policy.

The Fed in recent decades has influenced economic conditions by raising and lowering an interest rate called the federal funds rate. It is the rate that banks charge each other for short-term loans to meet regulatory requirements. There is little demand for such loans at present because the Fed's bond-buying campaign has flooded the banking system with excess reserves. The Fed said Wednesday that it would continue to refer to the federal funds rate in describing policy changes, but that it would put those changes into effect by raising two related interest rates that will function like a pair of crutches around the federal funds rate.

The Fed also affirmed that it plans to maintain its bond holdings, by replacing matured bonds, until after it starts to raise interest rates. It said that it then planned to allow its holdings to dwindle naturally, without asset sales.

A series of "quantitative easing" campaigns have increased the Fed's holdings of Treasury and mortgage-backed securities to more than $4 trillion.

That will allow officials to focus on the Fed's primary policy tool, the federal funds rate, which has been held near zero since December 2008. Markets generally expect the Fed to start raising rates in the middle of 2015, roughly in line with the predictions and public remarks of Fed officials, including Ms. Yellen. But the exact timing of the first increase remains the subject of considerable debate.

Fed officials are increasingly convinced that economic growth is gaining steam. They are now trying to gauge how much of the damage caused by the Great Recession can still be repaired. If they push too hard and too long, unsustainable growth could eventually generate faster inflation. If they stop pushing too soon, however, some of the damage to the economy may become more lasting. Many people who could have found jobs may never return to the work force.

Officials have pointed to the low level of inflation as evidence that there is no immediate need to pull back from the stimulus campaign. The Fed regards 2 percent annual inflation as the healthiest level for the economy. A government report Wednesday said inflation as measured by the Consumer Price Index rose just 1.7 percent during the 12 months ending in August — and the Fed prefers a separate measure that shows even less inflation than the consumer index.

The Fed also is focused on the labor market. The unemployment rate has fallen from a peak of 10 percent to 6.2 percent in August, but Fed officials generally think it can be pushed well below 6 percent without risking higher inflation.

Moreover, many Fed officials — including Ms. Yellen — expect some people who have left the labor market to start looking for work again as the economy improves. They note that wage growth remains around the pace of inflation, suggesting that employers are feeling little pressure to compete for the workers that they need.

Still, the progress of the recovery has shifted debate inside the Fed. The strongest supporters of the stimulus campaign have stopped pushing for its extension, and instead are focused on advocating for a gradual retreat. Other officials, meanwhile, are pushing for the Fed to begin that retreat as early as the first quarter of 2015.

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