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The Fed’s not ready to act yet

The Federal Reserve’s Open Market Committee voted unanimously Wednesday to remain “patient” on raising short-term interest rates since inflation is still below its 2 percent target.

At her December press conference, Chair Janet Yellen clarified that being “patient” meant waiting at least two FOMC meetings before raising rates. If that remains the case, the next opportunity for a rate hike would be the committee’s June 16-17 meeting.

Notably this month, the committee described the expansion of economic activity as “solid,” whereas in previous statements they had said it was only “moderate.” Since the FOMC’s last meeting in mid-December, the unemployment rate has declined to 5.6 percent — the lowest since before the Great Recession. And 2014 marked the biggest year for job creation since 1999.

While the Fed noted those labor market improvements, maximizing employment is only half of the central bank’s dual mandate. Its other priority is keeping prices stable. “Inflation is anticipated to decline further in the near term,” the committee wrote in their policy statement. The Fed predicts gradual increases as the labor market continues to improve and the economy adjusts to lower energy prices.

As the committee has indicated many times before, it may be necessary to keep the Fed Funds rate low even after inflation and employment reach their mandated targets. The committee added the word “international” to its description of indicators it will be watching when deciding when to raise rates. As always, the Wall Street Journal’s Fed Statement Tracker very helpfully compares the wording changes between each month’s FOMC statements.

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