The Federal Reserve just ended its April meeting without raising interest rates -- which we pretty much knew would happen going in.
The central bank's statement regarding its decision doesn't bode particularly well for an increase in June either, with members of the monetary policy committee noting that inflation is still short of the goal of 2% and only gradual increases in interest rates are likely. Hard data remains conflicted, which the Fed acknowledged its own statement.
Recent assessments show "that labor market conditions have improved further even as growth in economic activity appears to have slowed," the Fed said. "Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft."
The statement is little changed from what the Fed said last month, when it stepped back from expectations that it would raise rates as many as four times this year, as the domestic economy improved and approached full employment. In March, the Fed emphasized that international developments and rising interest rates for corporate debt, especially higher-risk credit, "continue to pose risks,'' and walked the pace of increases back to just two, which would leave rates at a range of 0.75% to 1%.
"There is no reason from this statement to assume that a rate hike is coming anytime soon," economist Joel Naroff, of Naroff Economic Advisors, said in an e-mail.
It's worth remembering that there are two reasons why any central bank raises rates: Because it can, and because it has to. Neither one applies very strongly to the U.S. now, though they are getting closer.
The "because it has to" argument holds that rates should be higher to combat incipient inflation, but the inflation we see is still a long way from scary.
The Fed is applying its 2% target rate to personal-consumption expenditures, or PCE, which exclude food and energy. That has bumped up some in the last few months, but as of February, prices had risen just 1.67% for the prior 12 months. It's hard to believe there are huge pent-up price pressures in the U.S. -- wages have risen about 2.3% for the past 12 months, investment by businesses has been moderate because companies don't need more production capacity to meet demand, and in fact, capacity utilization in manufacturing is still at a sluggish 75%.
The last two times inflation got away from the Fed -- in the early and late 1970s -- capacity utilization was 10 percentage points higher.
Throw in the fact that we haven't had a year where core PCE inflation topped 2.25% since 1993, and a certain complacency about inflation isn't out of whack. Some members of the Fed's Open Markets Committee may disagree -- vice chair Stanley Fischer has had moments of hawkishness and Kansas City Fed President Esther George wanted to raise rates another 25 basis points on Wednesday -- but the majority appears to think a hike isn't necessary.
The "because it can" argument for raising rates is stronger, but has buckled in recent months amid everything from worries about China and U.S. exports to fears that the drop in oil prices will lead to a wave of junk-bond defaults by energy producers.
Unemployment is at 5%, and record lows in new jobless claims in recent weeks make the case that it's going to go even lower in the months ahead; indeed, it already dipped to 4.9% in January and February. Wage gains have picked up some - but, mostly, real wage gains have been excellent for the last two years because inflation has been so low.
A 2.3% raise isn't bad when core inflation is 1.2%, as it has been until recently, and collapsing gas prices have helped the consumer price index actually rise less.
But Fed Chair Janet Yellen has been consistent about emphasizing less-traditional measures of full employment such as the so-called U-6 rate, which show a market farther from full employment.
The U-6 is the sum of the percentage of workers unemployed, those discouraged and out of the work force, and those who are working part-time but want full-time jobs. That rate is 9.8% -- down from 17.1% in April 2010 but still above the 9% that is the benchmark of a full recovery. The U-6 was last below 9% in 2007.
The Fed's statement suggests it is sitting still while it waits to see how this dance between improvement and residual weakness plays out.
On the one hand, fairly strong consumer spending (until recently) has buoyed home improvement chains like Home Depot (HD - Get Report) and Lowe's (LOW - Get Report) , as well as restaurant chains like Panera Bread (PNRA) , even while it didn't do much to save the holiday for department store and broadline retailers like Macy's (M - Get Report) , Nordstrom (JWN - Get Report) and Wal-Mart (WMT - Get Report) .
Battling that is the 11% drop in U.S. exports to China in the first two months of this year, as reported by the Census Bureau. That hits everyone from Alcoa (AA - Get Report) to Caterpillar (CAT - Get Report) , as companies either lose exports directly or find themselves facing Chinese companies attacking export markets to make up for weak sales at home.
So which set of forces have the upper hand? The Fed doesn't know, and neither do you.
But the Fed does know that low inflation gives it the luxury of waiting to find out, rather than taking the chance that hiking rates quickly will panic markets into stalling the real economy.
So that's why it stood pat today. And that's why futures markets see a better-than-50% chance that the next rate hike isn't until at least September, and a 30% chance it won't come until 2017 -- even though a lot of professional economists are more optimistic about the economy than the markets are.
"There was no statement on the balance of risks, which some had thought would be included to signal the June meeting was in play," Regions Financial chief economist Richard Moody said in an e-mail. "This basically gets them back to their 'data dependent' mantra with 'only gradual' increases in the federal funds rate."
Slower increases are a disappointment for banks, since interest income at firms from JPMorgan Chase (JPM - Get Report) to Citigroup (C - Get Report) and Bank of America (BAC - Get Report) has already been curbed by seven years of near-zero rates.
The Fed's 25 basis-point increase in December was the first since the central bank cut rates to almost zero in 2008; in an ordinary economy, banks typically benefit from passing along rate increases to borrowers more quickly than to depositors.