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Federal Reserve Won’t Raise Interest Rates Before June, at Earliest

With inflation still weak, Janet L. Yellen, the Federal Reserve chairwoman, has remained reluctant to raise the Fed’s benchmark interest rate earlier than June.Credit...Cliff Owen/Associated Press

WASHINGTON — The Federal Reserve kept its options open on Wednesday, signaling that it would not raise short-term interest rates any earlier than June, while leaving unresolved how much longer it might be willing to wait before lifting its benchmark rate from near zero, where the central bank has held it for more than six years.

Treating the recent turmoil in markets as essentially meaningless noise, the Fed issued its most upbeat assessment of economic conditions since the recession, after its first policy-making meeting of the year, in a statement that noted solid economic growth and strong job growth.

But the optimistic tone was tempered by the Fed’s acknowledgment that inflation has slowed markedly in recent months and is likely to slow even more, making it harder for the Fed to determine how quickly to retreat from its stimulus campaign.

Fed officials for more than a year have pointed to the summer of 2015 as the likely time for the central bank to increase its benchmark interest rate, but investors are increasingly convinced that the sluggish pace of inflation will force the Fed to wait until fall at the earliest.

The Fed, for now, is basically watching economic developments to see what happens.

“They don’t want to exclude June from the range of options at this point,” said Tim Duy, an economist at the University of Oregon who follows the Fed closely. “June is still five months off, and they have no intention of deciding just yet.”

The Fed has tried for years to spur faster job growth, and it seems to be working. Average monthly job gains have increased in each of the last five years, reaching 246,000 a month last year. The unemployment rate fell to 5.6 percent in December, closing in on its prerecession level of around 5 percent.

The economic expansion is gaining strength as confident consumers spend more, heartened by the rise in employment and the fall in oil prices.

The weakness of the global economy received only a passing mention, in a sentence noting that the Fed would pay attention to “international developments.” Michael Gapen, chief United States economist at Barclays Capital, said Fed officials seemed relatively sanguine about the problems of other developed nations.

“Altogether, we believe the Fed sees the combination of central bank actions and lower oil prices as outweighing the negative effects on growth and inflation from a stronger dollar,” Mr. Gapen wrote in a note to clients on Wednesday.

But the Labor Department’s Consumer Price Index rose 0.8 percent in 2014, the slowest pace during a time of economic growth in half a century.

The Fed’s stated goal is to keep prices rising at an annual rate of about 2 percent, part of its effort to support economic growth and grease the wheels of commerce. But it has not hit that target in more than two years, and it is increasingly unlikely to achieve it this year.

The rapid fall of oil prices is largely responsible for the decline, and the statement reiterated the view of most Fed officials that inflation will rebound “as the labor market improves further and the transitory effect of lower energy prices and other factors dissipate.”

The short-term fluctuations, however, make it harder for the Fed to determine how much of the recent decline in inflation might reflect more enduring economic weakness.

Wage growth remains weak as companies continue to find an abundant supply of potential employees. Recent research by the Federal Reserve Bank of Chicago suggests that the decline in the unemployment rate overstates the recovery of the labor market because some people who have stopped looking for work are likely to return as the recovery gains strength. Moreover, those who continue to look for work are disproportionately older and better educated, groups with historically lower rates of unemployment, suggesting that the Fed may be able to push the overall unemployment rate below 5 percent without unleashing significantly higher inflation.

Mr. Duy predicted that wage growth would play a critical role in determining the Fed’s timing. Average hourly earnings rose only 1.7 percent in 2014, reflecting an abundance of job seekers. Moreover, until wages rise more quickly, higher inflation most likely would not endure because it would erode real wages, reducing demand.

“They really need to see some wage growth in order for them to move in June,” Mr. Duy said. “Unless you have enough pressure on labor markets to generate higher wages, it’s tough to see how you get to sustainably higher inflation.”

The statement was passed by a unanimous vote, a contrast with the three dissents at the previous meeting in December of the Federal Open Market Committee, the Fed’s policy-making body, which also met on Wednesday. The change, however, does not necessarily reflect greater internal harmony. Instead, the three regional reserve bank presidents who dissented in December rotated out of voting seats on the committee and were replaced by three members of the majority.

The statement, as expected, said for the second consecutive meeting that the Fed “judges that it can be patient in beginning to normalize the stance of monetary policy.” Janet L. Yellen, the Fed’s chairwoman, said after the Fed’s December meeting that the language indicated that the Fed would wait at least two meetings before raising rates. Its inclusion in the latest statement means the Fed does not intend to act at its meetings in March or April.

That puts the focus on the Fed’s meeting in June.

Fed officials have long pointed to that June meeting as the most likely date for a first rate increase, and some analysts continue to regard that as a good bet.

“The statement leaves the door open to the first hike in June, if the labor data continue on their current path,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.   “We are surprised markets seem more interested in the acknowledgment of the (obvious) near-term downside inflation risks.”

But investors are increasingly skeptical. Measures derived from asset prices suggest that investors do not expect a first rate increase until autumn. The yield on the benchmark 10-year Treasury bond fell 10 basis points on Wednesday.

David Mericle, an economist at Goldman Sachs, wrote last week that the Fed “would find it hard to justify” a rate increase while inflation continued to decelerate.

Goldman still predicts that the Fed will raise rates this year. Morgan Stanley, on the other hand, predicted on Monday that the Fed would not raise rates until 2016.

“We believe the F.O.M.C. would risk entrenching inflation expectations at levels inconsistent with its 2 percent goal if it were to push forward with rate hikes as early as June,” Morgan’s economic forecasters wrote in a research note.

Some Fed officials have cautioned that the difference between June and September may matter to investors, but it does not have much economic significance.

“After six years of recovery and considering all that has both transpired and been accomplished, I don’t think we policy makers should get too rigid about liftoff a little earlier or later,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech this month.

Mr. Lockhart and other officials have also sought to emphasize that the first rate increase will not end the Fed’s stimulus campaign because the Fed is likely to keep rates at unusually low levels for years to come.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Fed Won’t Raise Rates Before June, at Earliest. Order Reprints | Today’s Paper | Subscribe

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