It looks like the Federal Reserve may not raise interest rates this year after all.
On Wednesday, the central bank released notes from its latest monetary policy meeting. Although it highlighted a number of positive economic developments, it made a point to reduce expectations of a near-term increase in the benchmark Federal funds rate, the overnight rate at which banks borrow each other's excess reserves.
The Fed's job is to balance the goal of full employment (evidenced by an unemployment rate of approximately 5%) against the goal of price stability (represented by an annual inflation rate of 2%). It does so by, among other things, raising or lowering the rate at which banks borrow from each other in the Fed funds market.
Higher rates typically accompany rapid economic growth while lower rates generally go hand in hand with economic malaise.
It's for this reason that analysts and commentators have long expected the central bank to begin raising rates this year. Unemployment is down to 5.3%. Corporate profits are higher than ever. And we're even beginning to see signs of wage growth at companies like Walmart and McDonald's.
In February, Walmart reported plans to raise wages for a half-million entry-level workers to at least $9 an hour by April and to at least $10 an hour by February 2016. The retailer followed up four months later by saying that it will also increase the starting wage of managers, who will now receive at least $13 an hour compared the prior minimum of $10.30 an hour.
Taking a page out of the same playbook, McDonald's announced in April its plans to increase pay for some 90,000 workers. The boost, which goes into effect this month, raises hourly pay to $1 above the applicable minimum wage. It now expects its average hourly rate to exceed $10 by the end of 2016.
Moves like this matter because one of the most effective ways to rouse a consumer-based economy from a post-recession slumber is to increase wages. This fills consumers' pockets with cash, which they will then cycle back into the economy by going to restaurants, buying new cars, or making down payments on new homes.
Trends like these led members of the Fed's monetary policy committee to conclude in April "that economic conditions had progressed to a stage at which the Committee's decision to begin normalizing policy would appropriately be determined on a meeting-by-meeting basis." In other words, the central bank was communicating that an increase in rates was potentially imminent.
However, the Fed's latest announcement now suggests that its prior hint at a possible rate increase was premature. According to its press release:
- Most participants at the latest meeting judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision.
- Many participants emphasized that, in order to determine that the criteria for beginning policy normalization had been met, they would need additional information indicating that economic growth was strengthening, that labor market conditions were continuing to improve, and that inflation was moving back toward the Committee's objective.
- Some participants viewed the economic conditions for increasing the target range for the federal funds rate as having been met or were confident that they would be met shortly.
In short, thanks in no small part to the deterioration of conditions in Europe, combined with growing concerns about China's economy, it seems increasingly likely that the Fed will sit pat for the rest of 2015 while economies in the United States and around the world continue to mend.
John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.