This article, originally published at 2:32 p.m. on Wednesday, Sept. 21, 2016, has been updated with comments from Federal Reserve Chair Janet Yellen and economists.
The Federal Reserve, as expected, didn't raise interest rates today -- but the central bank sent mixed messages about whether the economy is strengthening that sparked fresh criticism of a central bank increasingly seen as indecisive.
The action leaves the target range for the closely-watched Federal Funds Rate at 0.25% to 0.5%. But the language in the post-meeting statement issued by the Fed's Open Market Committee and the economic projections of the committee's members pointed in different directions.
The language suggested the economy is gaining steam, while the projections pointed to weaker medium-term growth and a slower upward path to rates than the Fed has seen as likely until now, while continuing to predict that the central bank will boost rates at least once this year, probably in December.
Committee members said that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. In a notably more upbeat summation of the economy than the committee made in its July statement, the Fed said "the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid."
"We're generally pleased with how the U.S. economy is doing," Fed Chair Janet Yellen said at a news conference. But, she added, the recent jump in workforce participation and other measures indicate the economy still has enough slack that inflation isn't a major risk. "The economy has a little bit more room to run than we thought, which is good.''
Indeed, three of the 10 voting members of the committee wanted to raise the target range for short-term interest rates by a quarter of a point.
"I think they are laying the groundwork for a December rate hike, but after two disappointing prints on gross domestic product growth they want to wait and see if growth has actually recovered in the third quarter," said Brian Coulton, chief economist at Fitch Ratings. "The labor-market data seems less of a reason to wait now, but the recent weakness in non-oil business investment is likely giving them grounds to hold off a bit longer."
Economic projections released along with the statement show that the members of the committee reduced their median estimate of this year's growth in the economy to 1.8% from a projection of 2% in June, and trimmed their projections for how quickly rates will be likely to rise over the next two or more years.
The inaction, regardless of the members' seemingly growing support for a rate hike, didn't sit well with some economists.
"If you want to consider this a 'hawkish hold,' knock yourself out, but saying the case for a rate hike has strengthened but opting to wait simply means there are now three more months for something to go wrong and fend off a December rate hike," Regions Financial Chief Economist Richard Moody said in an e-mail. "This statement doesn't do much for their credibility."
Brian Sozzi, a columnist for TheStreet's subscription-based premium site Real Money, added in an analysis of the Fed's move that the central bank is "talking out of both sides of its mouth. The market loves it, so why not ride out the bullishness for now?"
See full coverage of the Federal Reserve's monetary policy here.
In the Fed's defense, the economy has been moving on two tracks in recent quarters, as Coulton suggests.
Consumer-led sectors have been growing at about a 3% annual clip this year, leading to solid stock gains for retailers from online giant Amazon (AMZN) and home-improvement leader Home Depot (HD) to mid-priced stores like Kohl's (KSS) and Wal-Mart (WMT) .
But investment-led areas of the economy have fared noticeably worse, hampered by growth slowdowns in Europe and Asia. Investment declines, and especially a drop in inventories, have hampered growth in gross domestic product during the first half of the year, and hurt shares of exporters like Boeing (BA) , United Technologies (UTX) and DuPont (DD) .
That has left the Fed struggling for the right answer on rates: Consumer sectors have moved beyond the need for that much monetary stimulus, even export-heavy manufacturers could be hurt by the likely rise in the dollar if the U.S. begins to raise rates while the European Central Bank and Bank of England are keeping rates low, and the Bank of Japan is trying to push inflation above the traditional 2% annual target.
Economic heavyweights like former Treasury Secretary Lawrence Summers have said the economy is entering a period of secular stagnation, or longer-term slow growth. Yellen, implicitly nodding to the secular-stagnation school, said the shallower path of interest-rate increases in the new projections coupled with the bullish language, suggests that it's difficult to understand how the relatively strong consumer sector and sluggish investment are coexisting, and how to design policy that fits both.
The Fed is struggling with difficult questions about the economy's new normal, Yellen said. "We find the economy has a bit more running room, but we don't want the economy to overheat,'' she said. Still, today's very low rates give the Fed plenty of tools to fight inflation by hiking rates later if prices pick up, she argued.
One important question is whether the economy's lower potential growth rate means inflation will turn upward as unemployment moves toward 4% of the work force, from 4.9% now.
Moody's Analytics economist Ryan Sweet said the Fed's hesitation to move off near-zero rates amid the sub-1% annual gains in some inflation leaves the economy vulnerable if prices start to climb rapidly.
"The Fed is likely underestimating the amount of inflation that will develop over the next couple of years," Sweet said. "The Fed isn't behind the curve yet, but they can't lose sight of the economy or they will be forced to raise rates more aggressively than they and financial markets anticipate, which could undermine the expansion."