As expected, the Federal Reserve on Wednesday announced that it would raise the target range for the federal-funds rate to between 0.25% and 0.5%. The decision raises more questions than it settles. Most involve uncertainty about future interest-rate changes, and some about technical or operational issues.
The Federal Open Market Committee’s rationale for its decision offers clues about what may come next. Future decisions, the FOMC said, will be dependent on “a wide range of information.” That by itself is not informative, but a reading of the entire news release suggests that continued improvements in labor-market conditions will be critical to future rate decisions. The first paragraph discusses the improvement in labor-market conditions. These conditions are also the first item mentioned in the list of information to be considered for monetary-policy decisions.
The Fed’s dual mandate requires the FOMC “to foster maximum employment and price stability.” The Fed is counting on the actual inflation rate to move up to its target rate of 2%. Thus far, inflation has stubbornly remained below that target. Fed officials are anticipating that tightening labor-market conditions will produce upward pressure on wage rates and then prices.