Yellen makes Fed choice on rates a cliffhanger

Federal Reserve Chair Janet Yellen testifies on Capitol Hill in July. Nine years after they last raised their benchmark interest rate and after months of feverish speculation, Fed policymakers this week may finally raise that rate from a record low near zero.

Janet L. Yellen, the Federal Reserve chairwoman, faces a crucial moment Thursday when the Fed’s policymaking committee announces whether the time has come to start raising interest rates.

Liberal activists, economists and some policymakers are pressing hard for Yellen to continue the Fed’s stimulus campaign of near-zero rates because the economic recovery remains far from complete, leaving most Americans still struggling to pay their bills on stagnant incomes.

At the same time, Yellen faces growing internal pressure to start raising rates from Fed officials who are concerned about froth in financial markets and about maintaining control of inflation.

Analysts say the decision will bring into sharper relief Yellen’s priorities as perhaps the most powerful economic official in the world.

“They are paying a lot more attention to the labor market than in the past,” said William Spriggs, chief economist at the AFL-CIO. “I know it’s in the Fed’s thinking. I know it concerns them. I just hope that it’s deep enough a part of their equation that they wait to see real progress happen.”

For much of the summer, the Fed seemed on track to announce after this meeting of the Federal Open Market Committee that it would raise its benchmark interest rate for the first time since the financial crisis. The last time the Fed raised rates was more than nine years ago, and it has kept rates near zero since the end of 2008.

Then China swooned and markets skittered downward, and Fed officials started wondering aloud whether it might make sense to wait at least a few more weeks, if not longer.

That has turned the outcome of the September meeting into something of a cliffhanger.

“The F.O.M.C.’s near-term strategy has become so opaque that even the most seasoned analysts can only guess what policy decisions may be forthcoming at its upcoming meetings,” wrote Andrew Levin, an economics professor at Dartmouth College who worked at the Fed as an adviser to Yellen.

The sense of mystery owes partly to Yellen’s silence. In early July, she told an audience in Cleveland that “communicating with the public is an important part of my job.” The next week she testified twice before Congress. But for two months, she has said nothing.

She will speak for the first time since July at a news conference Thursday afternoon, at the conclusion of the Fed’s two-day meeting, which convened Wednesday.

The Fed has already kept its benchmark rate near zero much longer than anticipated. Officials in 2012 agreed to keep rates near zero until the unemployment rate fell below 6.5 percent. Unemployment fell to 5.1 percent in August.

Those advocating for the Fed to extend its campaign argue there is still room for more progress on jobs, which could help lead to higher wages as well.

Strikingly, the list of public warnings against raising rates includes President Barack Obama’s former economic advisers. Lawrence H. Summers, who was head of the National Economic Council, has said in articles and interviews that it would be a “serious error” for the Fed to raise rates. Gene B. Sperling, his successor, made the same argument in a recent opinion article for Politico.

Liberal activists plan to rally outside the office building where Yellen will speak on Thursday. Rep. John Conyers Jr., D-Mich., will address the gathering.

Spriggs, the AFL-CIO economist, said keeping rates low is particularly important for minorities, because a tight labor market makes discrimination more expensive. The unemployment rate for blacks with college degrees is higher than for whites with high school degrees.

“I think the data are rather clear that it takes a while for employers to expand outside their natural networks and reach black workers and bring their unemployment rates down,” Spriggs said. “If we stay the course, we will get to a point at which firms are willing to do more to find workers.”

The Fed’s vice chairman, Stanley Fischer, who has spoken several times during Yellen’s quiet period, suggested in late August that labor markets were strong enough for liftoff.

Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote last week, “There should be little doubt that the Fed has achieved, or is very close to achieving, its employment objective.” He said the Fed would be wise to raise rates in September, rather than waiting until later in the year, because “adding up trivial delays can put policy nontrivially behind the curve.”

The policy committee still has meetings scheduled in October and December.

The Fed also faces political pressure to start raising rates, although it has not been nearly as strong in recent months as the pressure to wait. Sen. Rand Paul, R-Ky., who is running for president, wrote Tuesday in an opinion article in The Wall Street Journal that the Fed should “set markets free” by raising interest rates, which he said would encourage economic growth.

Yet there is reason to think the Fed will wait a little longer. Notably, Fed officials have emphasized that they do not want the first rate increase to surprise investors — and measures of market expectations suggest that many investors would be caught off guard if the Fed raises rates on Thursday.

Moreover, the Fed has a good reason to wait: Inflation remains sluggish, just 0.3 percent over the 12 months ending in July, and a global slowdown may suppress any short-term rebound.

If Yellen does persuade the committee to announce another delay Thursday, the vote is unlikely to be unanimous. At least one member, Jeffrey M. Lacker, the president of the Federal Reserve Bank of Richmond, has indicated that he expects to vote in dissent if the committee does not raise rates.

His last speech, this month, was titled, “The Case Against Further Delay.”