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It has been seven years of zero percent interest rates. What’s another two or three months among friends?

That’s the conclusion that Janet Yellen and her colleagues at the Federal Reserve reached in their policy meeting on Thursday. They left interest rates unchanged at the same near-zero level where they have been lodged since December 2008. For them, the risk of changing course prematurely just seemed higher than another couple of months of zero rates.

Ms. Yellen blinked, which is not to say she made a mistake. Sometimes blinking is a very sensible thing to do.

It’s clear that the Fed officials think that the economy is well on the path toward healing and that neither a modest interest rate increase nor a volatile stock market will wreck it. Inflation may have been persistently below the central bank’s 2 percent target the last few years, but it is on track to steadily rise in the year ahead.

That helps explain why 13 of 17 Fed officials continue to expect that interest rate increases will be warranted in 2015, according to newly released projections. In case you’re counting, that is a year with a mere 104 days left in it, and two Fed policy meetings, which kind of narrows the possibilities of what they have in mind for policy.

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Monetary Policy: Why Yellen Blinked on Interest Rates
Janet Yellen at a news conference Thursday after the Fed's policy meeting.Credit Brendan Smialowski/Agence France-Presse — Getty Images

What comes through in both the written materials the Fed released Thursday and Ms. Yellen’s comments in a news conference is the sense that they want just a little more assurance, from both economic data and financial market prices, that their underlying assumptions are correct.

After all, inflation data has been undershooting the Fed’s expectations for years. A drop in oil prices and a strengthening of the dollar since July will only hold inflation back further.

Continue reading the main storyMonetary Policy: Why Yellen Blinked on Interest Rates

OPEN Graphic

Graphic: Why the Fed Did Not Raise Rates

The unemployment rate is quite low, but there hasn’t been nearly enough time to judge whether the August market volatility, partly rooted in an apparent slowing in the Chinese economy, is going to do any lasting damage to the United States labor market.

Ms. Yellen took pains to argue that the Fed was not simply responding to a few rough weeks in the stock market, but rather had its eyes on the United States economy.

Continue reading the main storyVideo

The Fed’s Button on the Economy

When it comes to raising or lowering interest rates, what the Fed is really trying to do is balance growth and inflation. But they have a limited set of tools to accomplish their goal.

By Andrew Ross Sorkin, Aaron Byrd and Erica Berenstein on Publish Date July 29, 2015. Photo by Aaron Byrd/The New York Times. Watch in Times Video »

“The Fed should not be responding to the ups and downs of markets,” she said in her news conference. “But when there are significant financial developments, it’s incumbent upon us to ask ourselves, ‘What is causing them?’ What we can’t know for sure is how much concerns about the global economic outlook are drivers of those developments.”

It’s true that the cost of waiting a bit — to ensure that the economy continues to perform the way the Fed’s models predict — appears to be low. (Unless, that is, you count the lost productivity of scores of professional and semi-professional Fed watchers who now get to spend the remainder of the year furiously speculating on when interest rate increases will come).

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Monetary Policy: Why Yellen Blinked on Interest Rates
Traders awaited the decision at the Standard & Poor's 500-stock index options pit in Chicago.Credit Scott Olson/Getty Images

The challenge she and the policy committee will face is that 2015 may end without the open questions that led to the September delay being resolved. It can take many months for financial swings to ripple their way through the economy. For example, a steep drop in oil prices in the second half of 2014 is only now affecting capital investment in energy exploration — and hence United States economic growth.

There is no assurance that these critical questions — of whether inflation is finally, truly, really poised to rise, and whether economic softness in China and other emerging markets will crimp United States growth — will be resolved by December or even by the spring of 2016.

The United States economy is at an odd moment when unemployment is basically back to healthy levels, at 5.1 percent (though that masks large numbers of Americans who have dropped out of the labor force). Yet inflation continues coming in less than forecast, and the global economy looks perilous.

Fed interest rate decisions affect the economy with, as central bankers are fond of saying, “long and variable lags,” meaning it takes many months for them to affect growth and prices. How long is uncertain. As Stanley Fischer, the Fed vice chairman, said in a television interview last month, if the Fed waits until it is absolutely certain it is time to raise rates, it will probably be too late.

In other words, Fed officials inevitably have to make a decision based on what their models predict, not on cold hard evidence.

The decision to hold off on rate increases this week suggests Ms. Yellen and the Fed want a little more evidence that the economy is on the mend, but they may find themselves back in the same spot before they know it.

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