Divided Fed Inclined to Stand Pat

Federal Reserve officials, lacking a strong consensus for action a week before their next policy meeting, are leaning toward waiting until late in the year before raising short-term interest rates.

It is a close call. But with inflation holding below the Fed's 2% target and the unemployment rate little changed in recent months, senior officials feel little sense of urgency about moving and an inclination toward delay, according to their public comments and recent interviews.

The Fed's decision has become the subject of intense market speculation in recent days. Interest rates can affect stock valuations, the cost of financing a home and whether companies will take on big new projects, making the central bank the perpetual center of market attention. Wall Street is especially attuned to when the Fed will move after it has decided to hold rates steady so far this year.

For several weeks, investors saw a low probability of a rate increase in September, but they became more focused on the possibility of a move in recent days. Stocks tumbled on Friday, when traders interpreted comments from regional Fed bank officials as signals from the central bank that the likelihood of a rate move was rising.

On Monday, with those worries easing, the Dow Jones Industrial Average finished the day up 239.62 points, or 1.32%, at 18325.07, reversing some of Friday's losses.

Despite its hesitance, the Fed faces some external pressure to move. "Let's just raise rates," said J.P. Morgan Chase & Co. Chairman and Chief Executive Officer James Dimon at the Economic Club of Washington, D.C., on Monday. Bankers have been complaining more broadly that low rates hurt their profit margins because it holds down what they can charge customers for loans.

"You don't want to be behind the eight ball on this one, and I think it's time to raise rates," he said, and a quarter-percentage-point increase would be a "drop in the bucket."

Fed Chairwoman Janet Yellen will spend the week before the central bank's Sept. 20-21 policy meeting conferring behind the scenes with 16 officials to listen to their views and plot out a plan for the meeting. She confronts a divided group of policy makers and the potential for more internal dissent than has been common during her tenure running the Fed since 2014.

With the jobless rate at 4.9%, some regional Fed bank presidents believe that the labor market has largely recovered from the financial crisis of 2007-2009, and that short-term interest rates just above zero are no longer warranted. This group notes that risks to the U.S. economy from overseas have dissipated in recent weeks, strengthening the case for a move now.

For others, the watchword is patience. This group largely expects to raise rates this year but doesn't see a need to act now. These officials note the jobless rate hasn't moved much this year. Slack in the labor market is thus diminishing at a slower pace than before. That has reduced the urgency to raise the cost of credit to prevent the economy from overheating.

Moreover, because the economy is growing so slowly, this group doesn't believe rates need to move very high in the months and years ahead, thus the Fed can take its time.

"I don't feel that we are incurring the costs of patience," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told reporters after a speech on Monday.

Fed governor Lael Brainard -- who has been an outspoken voice in the camp of those who want to wait -- called for "prudence" in raising rates in a speech in Chicago on Monday.

The speech was closely watched in financial markets because some traders had speculated Ms. Brainard might reverse herself and throw her support behind a rate increase now. Instead, she laid out five arguments for why the Fed should stick to its strategy of moving rates up cautiously and slowly.

Among them, she noted, inflation hasn't been responsive to the decline of unemployment from 10% after the financial crisis to below 5%. Inflation's stickiness at low levels removes pressure on the Fed to act preemptively to head off a surge in consumer prices, she said.

The Fed's cautious, go-slow approach, Ms. Brainard said, "has served us well" and warrants continuing. She didn't directly address whether she would support or oppose a move in September.

A decision to delay would bring its own risks for Ms. Yellen. The Fed could be criticized for confusing market participants with mixed messages. Ms. Yellen herself argued in Jackson Hole, Wyo., last month that the case for a rate increase had strengthened. It was taken by some market participants as a sign that she was ready to move.

The Fed's benchmark interest rate -- an overnight bank lending rate called the federal funds rate -- has been held in a range between 0.25% and 0.5% since December.

Officials began the year thinking they would nudge it up in four quarter-percentage-point increments this year, but have routinely deferred action amid uncertainty about a range of issues -- including market volatility early in the year, soft jobs data in the spring and worries about the U.K.'s June vote to exit from the European Union.

Traders in futures markets place a 15% probability on a Fed rate increase in September and a 57% probability on a move by its Dec. 13-14 meeting. Fed officials are usually reluctant to surprise investors, another factor that tilts them toward delay.

Officials also meet Nov. 1-2, but a move seems unlikely then, just a week before Election Day.

"I would like to find a way for us to remove some amount of accommodation, but you can't force it," said Robert Kaplan, president of the Federal Reserve Bank of Dallas, in an interview. "You have to remind yourself it makes sense to be patient, because I don't think the economy is overheating."

The Fed might sound like it is waffling, but Mr. Kaplan said it is simply reacting to a mixed economic backdrop. "For the public hearing this, it sounds like, 'Boy, this is on-the-one-hand, on-the-other-hand,' " he said. "That's true. It is not that the Fed is being so agonizingly judicious. It is that the economy is expanding at a very moderate pace, and inflation has been very slow to get to our target, and we're reacting to that, and that's what people are seeing."

The central bank could have other market-soothing words on the longer-run outlook for rates at its September meeting. Officials in June had penciled in two quarter-percentage-point interest-rate increases in 2016, three in 2017 and three more in 2018, a path that would bring the federal funds rate to 2.375% by late 2018.

Officials release updated projections next week, and those could come down as officials coalesce around a view that rates will rise at an exceptionally gradual pace in the months ahead. Two rate increases in 2016 look especially unlikely.

At the same time, the Fed could present a more optimistic view about risks to the economic outlook. Early in the year, officials worried that a range of issues could derail growth and hiring. That included market turbulence tied to worries about China's economy and to Britain's decision to leave the European Union. Those worries have dissipated.

After flagging their worries for several months about risks to the economic outlook, officials could revert to calling these risks "balanced," meaning the central bankers have become more open to raising rates later this year, as long as the economy doesn't stumble in the weeks ahead.

--Michael S. Derby and Harriet Torry contributed to this article.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com