The Fed is very much trapped. Flooring interest rates and holding them there as long as they have is a desperate move by the Fed. It knows what happens to banks, insurance companies, pensions, and anyone who relies on fixed income when interest rates are kept low for a long period of time.

Most people assume that lowering interest rates is good for financial companies, but that is a misunderstanding. Or rather, it is a matter of time scale. In the shortest of terms, lowering interest rates is great for financial companies: it immediately and directly raises the price of many financial instruments, such as bonds, which become comparatively more attractive than new issues at the lower interest rate. When the primary issue was solvency of overlevered banks, low interest rates were very welcome, and kind of saved the day for the banks by raising the price and putting a persistent bid underneath their most precarious assets.

But even if they were a godsend to banks in 2009, when they were teetering on the brink of insolvency, low interest rates are not good for financial companies in the long term and even the medium term. Their portfolio may have gotten a much needed jolt upward, but it's a one-time thing, and after that, the longer the interest rates are floored, the more it happens that their higher interest rate portfolio items age off and are replaced by loans and bonds at rock bottom interest rates that don't pay them enough to be worth the considerable risk. In a chronically low interest rate environment, banks get weaker and weaker, pensions have very hard time making the 7-9% they need to remain solvent, insurance companies have to go out further on the risk curve in order to pay claims. In short, everyone has a hard time making their nut.

Basically, in 2007, the financial economy was put on life support. the Fed cannot admit that much of the financial world will collapse immediately as soon as interest rates materially rise, but that is in fact what will happen. Once the interest rates rise, asset values (which depend on easy money financing) will fall pretty much across the board. Funding will again be stressed for financial companies. Homes will again plummet in value, bringing banks along for the ride. And so on. It will be 2008 all over again.

That this will happen eventually anyway is beside the point. Given the choice between ushering in an immediate financial collapse as a direct result of its actions, or delaying it as long as it possibly can, the Fed has chosen the natural move: delay. A collapse later is preferable to a collapse now. Especially since, who knows how long it can keep later from being now. I don't know about you, but i'm a little surprised how long it has been able to so far. I would have given pretty long odds in 2008 against the Fed's ability to keep an extremely overpriced and overleveraged market from collapsing. But i was wrong. I still think it will fail eventually, but who knows when that will be?

In the meantime, they will continue to sound oh so serious about a material raise of interest rates. They might even manage to raise rates a trivial amount. But in general, they will always have good reasons not to raise materially. Their best path is in always looking like they might in the near future.