The US Federal Reserve kept its benchmark interest rate unchanged Wednesday and announced the end of a crisis-era stimulus program in a sign the economy is on sound footing and the central bank is ready to get back to business as usual.
The Fed statement on the unanimous decision following its two-day policy meeting was little changed from previous statements, reaffirming that officials expect the economic recovery to proceed amid continued gradual rate increases.
Most officials in their quarterly forecasts still expect to see a third increase in the federal funds rate this year, which economists expect will come in December.
But Fed Chair Janet Yellen was clear that those forecasts are not etched in stone. And she said that, with the mystery of low inflation still unresolved central bankers are prepared to move in any direction depending on how the economy evolves.
In her quarterly press conference, Yellen said, "we think the economy is performing well, and we have confidence in the outlook for the real economy."
However, if a "negative shock to the economy were sufficient," the Fed would be prepared to act either but cutting interest rates or resuming the bond-buying stimulus program.
And if persistently low inflation begins to accelerate, the Fed could raise rates more quickly.
"We are always watching the economy and will adjust policy as appropriate," she said. "There's nothing set in stone."
- Hurricane impact -
The Fed highlighted the devastation caused by Hurricanes Harvey, Irma and Maria, which it said are "inflicting severe hardship" on many communities, but said the impact on the US economy is likely to be felt only in the near term.
It cited past experience which has shown that "the storms are unlikely to materially alter the course of the national economy over the medium term."
Higher prices for gasoline and some other items "in the aftermath of the hurricanes will likely boost inflation temporarily," the Fed said.
However, 12-month inflation is still expected to remain below the Fed's two percent goal in the near term, stabilizing at the target rate only in the medium term.
Despite the hurricane impact, the Fed said it "continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and the labor market will strengthen somewhat further."
But Yellen acknowledged continuing consternation over very low inflation, which has shown little signs of life, even with a jump in August.
Despite nearly seven years of uninterrupted job creation and a very low unemployment rate of 4.4 percent -- which Fed officials forecast will go even lower -- inflationary pressures and wage gains have been tepid at best. This has baffled economists, given the strong labor market.
"What we need to do is figure out whether or not the factors that have lowered inflation are likely to prove persistent or they're likely to prove transitory," she said.
- End of stimulus -
However, she cautioned, "The fact that inflation is unusually low this year does not mean that that's going to continue."
In a long-expected move, the central bank confirmed it will end an unprecedented stimulus program launched at the height of the financial crisis, when the Fed had cut rates to zero and had no ammunition left to help support the economy.
The plan starting next month will gradually reduce the size of the Fed's $4.5 trillion in investment holdings, which were built up during the financial crisis.
In the final three months of this year the Fed will reduce its holdings of US Treasury debt and mortgage-backed securities by $10 billion a month, and every three months will reduce it by an additional $10 billion a month until the rate hits $50 billion a month in October 2018.
The Fed has said the "normalization" program is designed to run in the background, to avoid roiling financial markets. And the Fed will not be selling securities, but rather letting the debt mature and roll off its balance sheet.