The U.S. Federal Reserve left interest rates unchanged at its latest policy meeting, but indicated it was still on course to raise rates again by the end of the year despite an unexpected slowdown in inflation.
The members of the Fed’s open market committee voted unanimously to keep the federal funds rate within the current target range of 1% to 1.25%. Twelve of the 16 officials expect another rate increase this year, most likely in December.
The central bank did scale back its estimates of how high interest rates will rise. While it is still forecasting rates will rise to 2.1% next year, it lowered its 2019 target to 2.7%, down from its 2.9% projection in June.
“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” the Fed said in a statement.
As far as economic conditions, the statement said inflation on a 12-month basis “is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”
As MarketWatch reports, Fed officials “have been puzzled by the persistence of low inflation even as the unemployment rate fell in July to a 16-year low of 4.3%.” The bank’s preferred 12-month measure of inflation stood at just 1.4% in July and at a news conference on Wednesday, Fed Chair Janet Yellen several times referred to doggedly low inflation as a “mystery.”
“The Fed’s forecasts imply the bank is unwilling to freeze interest rates in an experiment to see how low unemployment can go without stoking inflation,” MarketWatch said. “Some bank officials want to pursue a less aggressive approach until clear evidence of rising inflation emerges, but that’s not a majority view.”
“It is too soon for the committee to conclude that the recent slowing in inflation was sufficiently permanent to alter the Fed’s plans,” economists at Barclays wrote in a note to clients.