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In a divided decision, the Federal Open Market Committee (FOMC) decided to maintain the federal funds rate in its current range of 1/4 to 1/2 percent for the sixth consecutive time. There were three dissenters at this meeting. Esther George (Kansas City Fed President) was joined by Loretta Mester (Cleveland Fed President) and Eric Rosengren (Boston Fed President), each of whom preferred to raise the target range by 25 basis points at this meeting.

No doubt there was a particularly lively discussion at this FOMC meeting, as the statement admitted that “the case for an increase in the fed funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives” of maximum employment and price stability.

Job gains have been solid and the economy has improved from the modest pace in the first half of the year, but inflation remains below the Committee’s 2 percent longer-run objective. This reflects earlier declines in oil prices as well as lower import prices owing to the strong dollar.

Although, the Fed’s press release didn’t mention it, officials are well aware that a rate hike would likely strengthen the dollar further, exacerbating the disappointingly high trade deficit. In addition, recent data have shown weakening retail sales and manufacturing and service sector activity. As well, housing starts have surprised on the low side. While the FOMC feels that household spending has been growing strongly, productivity-enhancing business fixed investment remains soft.

There is a very similar situation in Canada as we have heard from Governor Poloz this week.

Nevertheless, the Fed is clearly closer to raising interest rates, but believe that there will be only a gradual progression to higher rates. They assert that near-term risks to the outlook are balanced and that the stance of monetary policy remains accommodative, supporting further improvement in labour markets and a return to 2 percent inflation. Of course, as always, future Fed actions will continue to be data dependent.

At the start of this year, many had expected the Fed would have raised rates multiple times by now, following the first rate hike in seven years in December 2015. But economic activity grew at a snail’s pace in the first half, despite continuing improvement in labour market conditions, and inflation remained very low. Today’s statement signals that a 2016 hike is still likely, probably in December. Because November’s FOMC meeting comes within a week of the U.S. presidential election and isn’t followed by a press conference with Chair Janet Yellen, economists have viewed the Fed’s December meeting as a more likely candidate for an increase.

Expected Path of Future Interest Rates

The Fed’s so-called “dot plot,” which it uses to signal its outlook for the path of interest rates, shows that policy makers expect one quarter-point rate increase this year. FOMC members scaled back their expectations for hikes in 2017 and over the longer term. According to the median forecasts for the federal funds rate by Fed officials, the rate will end the year 1/4 point higher that currently–to .75 percent, followed by a 2017 yearend median forecast of 1.25% (implying two rate hikes next year), 1.75% at yearend 2018, and 2.75 percent at yearend 2019. The median estimate of the longer-term neutral (neither accommodative or tightening) fed funds rate is  just under 3 percent.

All of these forecasts are below earlier expectations, which have been revised down repeatedly all year. Central banks everywhere have been surprised by global economic weakness and the extraordinarily low level of interest rates. Many countries in Europe and Japan are posting negative rates with still disappointing effect. Clearly potential growth (noninflationary growth at full employment) is well below what it was in previous decades, largely as a result of an aging population and falling productivity growth.

Bank of Canada Governor Poloz estimates that potential growth in Canada is a mere 1.5 percent, well below the 3 percent level posted when Boomers were entering the labour force. Potential growth in the U.S. might be slightly higher, owing to a proportionately larger Millennial generation and continued higher fertility rates than in Canada. This is still much lower than the 3 to 4 percent growth rates the U.S. enjoyed when labour force and productivity growth was much stronger.

Global growth has also slowed considerably, now in a 2 to 3 percent range. As a result, analysts and policy makers are realizing that interest rates will remain lower for longer than earlier expected. Monetary stimulus is running out of ammunition and so pressures are mounting for fiscal stimulus, particularly infrastructure spending. Canada, in that regard, is ahead of the game as fiscal stimulus was introduced in the last federal budget.

Yellen Strongly Disavows Political Motivation

The latest decision could embolden Republican presidential nominee Donald Trump to unleash additional attacks on Yellen. The billionaire businessman said last week that the Fed “is being totally controlled politically” and might stand pat on rates for the rest of year. Yellen, a former economics professor at the University of California at Berkeley, was appointed Fed chair by President Barack Obama and served as President Bill Clinton’s top economic adviser.

This is another one of Trump’s conspiracy theories. The charter of the Federal Reserve and the Federal Reserve Act assures its political independence as Board members are appointed for 14-year terms and do not serve at the pleasure of the President, the Treasury or the Congress. Indeed, many Fed chairs have held very different views than the White House in years past.

Yellen made it very clear that no political discussions occur at the FOMC meetings and economic considerations are the only ones that matter in policy decision making. The full transcript of the meeting will be released in five years. Yellen said that she assures the public that these minutes will prove the independence of the Fed. I know of no serious economists that doubt the independence of the Fed.