What's Keeping the Fed From Raising Short-Term Interest Rates

NEW YORK (TheStreet) -- The Federal Reserve may be ending its monetary stimulus, but it's not quite ready to start signaling higher interest rates. For investors, that means the stock market has room to move even higher. 

Stocks rallied Tuesday after the Wall Street Journal said the Fed was likely to maintain its near-zero rate policy for a "considerable time," a key phrase for Fed watchers. The central bank will release its policy statement Wednesday afternoon, followed by a press conference by Chairman Janet Yellen. 

Although the inflation "hawks" have been making more noise lately about the need to raise short-term interest rates, Yellen still has enough support on her side -- as well as enough "soft" economic data -- to continue holding off.

Two other issues are playing an important role in the Fed's decision-making. 

First, Europe is facing another recession, with economic growth basically flat over the first six months of 2014 and deflation posing a definite threat.

The European Central Bank recently cut interest rates and is under pressure for some kind of quantitative easing to help revive the region's economy. That makes it harder for the Fed to move too quickly in the opposite direction. Signaling a rise in U.S. short-term rates would only worsen the outflow of funds from Europe. The Fed doesn't want to undermine the ECB.

Second, economic growth in the U.S. remains modest, with little apparent inflation. Labor markets remain slack enough so that there is little pressure on wages. And there is not much loan demand. 

As long as these elements remain, the Fed will find it difficult to push up short-term rates until the middle of 2015. That's when Fed officials believe the economy will start to grow faster and produce more loan demand.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


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