WASHINGTON: The Federal Reserve is keeping its benchmark interest rate unchanged at a time of low inflation, which remains persistently below the Fed’s target level.

The Fed noted on Wednesday in a statement that inflation has stayed undesirably low even though the job market keeps strengthening, with the unemployment rate just 4.4 per cent. Normally, solid job growth drives up wages and prices. But the Fed’s preferred gauge of inflation has moved further below its 2pc target in recent months.

The central bank decided after ending its latest policy meeting to leave its key rate unchanged in a range of 1pc to 1.25pc after having raised rates twice this year in March and June.

The Fed says it still envisions further “gradual” rate hikes. But many economists say they foresee no further rate increases this year unless inflation picks up.

With the US job market still solid after eight years of a grinding but durable recovery, the Fed has essentially met one of its two mandates to maximise employment. But it’s so far failed to achieve its other goal of stabilising inflation at a favorable level.

Inflation has been edging further below the Fed’s 2pc target in recent months. The problem is that too-low inflation can slow the economy by causing consumers to delay purchases if they think they can buy a product or service for a lower price later.

Months ago, the Fed had signaled its readiness to raise rates three times this year on the assumption that it needed to be more aggressive to ensure that consistently low unemployment didn’t contribute to high inflation later on.

But in testifying to Congress this month, Chair Janet Yellen had sounded less sure about her previous position that the slowdown in inflation this year was due to such temporary factors as a big drop in charges for cellphone plans.

Yellen conceded that Fed officials were puzzled by recent developments. Her remarks lifted financial markets as investors interpreted her words to suggest that the Fed might slow its pace of rate increases.

Published in Dawn, July 27th, 2017