The Federal Reserve has been hinting since last year at higher interest rates, but even recent meetings of the central bankers held little suspense – but Thursday is different.
Wall Street’s clear expectation was for monetary policy to be tightened in September or October, until last month’s Chinese stock panic and the stronger dollar wrought havoc on financial markets.
The Fed, which monitors economic data especially employment and inflation to calibrate its monetary policy, has held interest rates at an unprecedented near-zero range since December 2008.
US consumer prices contracted by a seasonally adjusted 0.1 per cent last month compared to July, government data showed Wednesday, as falling oil prices suppressed any hint of inflation.
Petrol prices were down 23.3 per cent for the month and were the “main cause” of the small decline in the consumer price index.
The renewed fall in oil prices – partly a sign of weakness in the global economy – could give the Fed another reason to delay action.
For the past 12 months, prices on all goods in the United States were up 0.2 per cent. Oil prices have fallen by more than half on world markets since last year, muting inflation across advanced economies.
According to minutes from the last Fed meeting on July 29, one member of the monetary policy-making committee “indicated a readiness to take that step” of a rate hike, “but was willing to wait for additional data to confirm a judgement to raise the target range.”
Overall, the panel “concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met.”
For most of the summer, a strong consensus of Wall Street economists expected the Fed to take action either at Thursday’s meeting or at the next meeting on October 28.
Those forecasts were thrown into chaos by the August rout on global equity markets, which caused a tightening of private lending conditions.
The effect on the US economy was potentially similar to what the Fed would be trying to achieve with an interest rate hike. But the chill could be fleeting, as spooked investors regain their nerve.
Federal Reserve Vice Chairman Stanley Fischer told financial broadcaster CNBC last month that waiting for “overwhelming” evidence to act on monetary policy would be a mistake.
“If you wait that long, you will be waiting too long,” he said.
“There is always uncertainty and we just have to recognize it. We’ll have to make a decision in the face of considerable uncertainty.”