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Fed expresses “patience” in deciding when to hike interest rates Fed expresses “patience” in deciding when to hike interest rates
(about 17 hours later)
The Federal Reserve on Wednesday said it would be "patient" in deciding when to begin to increase interest rates, suggesting that the recent burst of positive U.S. economic data hasn't moved up widely-expected plans to begin to raise rates sometime next year. Seeking greater flexibility, the Federal Reserve introduced new language to describe the timing of an interest rate increase widely expected in the middle or latter half of 2015, but in an effort to keep markets calm the Fed didn’t completely let go of the old language.
In a carefully worded statement, the Fed said it can  “can be patient in beginning to normalize” its monetary stance, with still-elevated unemployment and below-target inflation giving the central bank flexibility to take a gradual approach to increasing rates. The Federal Open Market Committee added that this plan is consistent with a previous promise to keep interest rates near zero "for a considerable time." The Fed’s Open Market Committee met this week and said it would be “patient” in deciding when to increase interest rates, suggesting that the recent burst of positive U.S. economic data hasn’t moved up the central bank’s plans to begin raising rates around the middle or second half of next year.
Still, the language wasn't quite as bold as what the central bank had said in October, when it flatly promised to keep rates low for a "considerable time." In that regard, the new statement could be interpreted as an acknowledgement that economic growth has been robust and the Fed is prepared to raise rates next year, but that it isn't moving materially faster toward doing so. In a carefully worded statement, the Fed said it can “can be patient in beginning to normalize” its monetary stance because the unemployment rate is running above and the inflation rate is running below the central bank’s own targets. The FOMC added that this patient approach is “consistent with” a previous promise to keep interest rates near zero “for a considerable time.”
"However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated," the statement said. "Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated." That old language — “considerable time” — used in Fed guidance in recent months had come to be seen by markets as a flat promise to keep rates low, and Fed Chair Janet L. Yellen said in March that it was a period lasting six months. The new, more vague language of patience was interpreted as an acknowledgment that the Fed is moving closer, but not faster, toward raising rates next year.
For now, the Fed said it would keep its target range for the federal funds interest rate between zero and a quarter percent. Fed Chair Janet Yellen has previously suggested that a "considerable time" would mean about six months -- meaning that the first rate hikes might occur in the middle of next year -- though Fed officials have cautioned there's not a specific timeline. But in trying to reassure markets, the Fed blurred any difference between the two formulations, analysts said. In a news conference Wednesday afternoon, Yellen even attached a time element to the new language, saying patience meant the Fed was “unlikely to begin the normalization process for the next couple of meetings.” The Fed will next meet in January, followed by March, April, June and July.
In a press conference Wednesday afternoon, Yellen said it is "unlikely to begin the normalization process for next couple of meetings." The Fed will next meet in January, followed by March, April, June and July. The stock market breathed a sigh of relief, and key indicators rose 1.69 to 2.12 percent.
In its statement and accompanying materials, the Federal Reserve also said that the overwhelming majority of its open market committee members currently expect that the central bank will raise the federal funds rate by between .75 and 1.75 percentage points 2015. Only two expected no change. The Fed also said that relatively high unemployment and its own new, lower forecasts for inflation “may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” “I think they took a baby step toward interest rate hikes,” said Mark Zandi, chief economist of Moody’s Economy. “It wasn’t the man-size step widely anticipated, and that’s why the stock market is so happy about the decision. I think they’re ever so gingerly stepping toward rate hikes.”
The decision reflects the central bank’s confidence that the economy is “expanding at a moderate pace” with consumer confidence levels back at 2007 levels, corporate and household balance sheets in better and better shape, and the job market improving. The Fed’s meeting came amid turmoil in global markets, with oil prices plunging 50 percent since summer, Europe and Japan mired in recession, and Russia battling to stabilize its collapsing currency and deal with a sharp downturn brought on by oil prices and sanctions.
The Fed raised its estimates of economic growth for 2014, boosting its forecast to 2.3 to 2.4 percent for this year but left unchanged its previous forecast of 2.6 to 3.0 percent growth for 2015. Yellen said the committee discussed these issues but said they had little impact on the U.S. economy. She said the drop in oil prices had brought down inflation, but that the Fed saw it as a “transitory” phenomenon.
The Fed said it expects the unemployment rate to drop slightly faster than it did in September, predicting it would fall to either 5.2 or 5.3 percent in 2015, a level the central bank still regards as too high. In seeking to move away from a commitment to keep rates low for a certain period of time, the Fed tried to peg change in interest rates more closely to economic data.
Slumping oil prices drove down the Fed’s 2015 inflation forecasts, which it sliced to a range of 1.0 to 1.6 percent for 2015, down sharply from its September forecast and well below its 2 percent target. “If incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated,” the statement said. “Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”
The Federal Reserve also shaved its 2015 forecast for inflation not including energy and food, to a range of 1.6 to 1.9 percent. Those figures reflect the mainstream thinking of the Federal Reserve Board members, not counting the three highest and three lowest projections. For now, the Fed said it would keep its target range for the interest rate on federal funds between zero and a quarter-percent. In its statement and accompanying materials, the Federal Reserve also said that the overwhelming majority of its open market committee members currently expect that the central bank will raise the federal funds rate by between 0.75 and 1.75 percentage points in 2015. Only two expected no change.
The central bank expressed confidence that the economy is “expanding at a moderate pace” with consumer confidence levels back at 2007 levels, corporate and household balance sheets in better and better shape, and the job market improving. But the Fed also said that relatively high unemployment and its own new, lower forecasts for inflation “may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
The Fed raised its estimates of economic growth for 2014, boosting its forecast to 2.3 to 2.4 percent for this year but left unchanged its previous forecast of 2.6 to 3.0 percent growth for 2015.
The Fed said it expects the unemployment rate to drop slightly faster than it did in September, predicting it would fall to either 5.2 or 5.3 percent in 2015.
Slumping oil prices drove down the Fed’s 2015 inflation forecasts, which it sliced to a range of 1.0 to 1.6 percent for 2015, down sharply from its September forecast and well below its 2 percent target.
The Federal Reserve also shaved its 2015 forecast for inflation, not including energy and food, to a range of 1.6 to 1.9 percent. Those figures reflect the mainstream thinking of the Federal Reserve Board members, not counting the three highest and three lowest projections.
Three members of the Fed open market committee voted against the final report. Richard W. Fisher said interest rates could be raised earlier, Narayana Kocherlakota said it hurt the credibility of the 2 percent inflation target and Charles I. Plosser said it should not stress time as an element of guidance about future actions.