Fed promises ‘patient’ approach to a rate increase

WASHINGTON (AP) — The Federal Reserve is edging closer to raising interest rates from record lows given a strengthening U.S. job market and economy. But it will be “patient” in determining when to raise them.

That was the message that emerged Wednesday as the Fed ended a policy meeting and Chair Janet Yellen held a news conference amid heightened expectation about the Fed’s timetable for a rate increase.

The central bank said in a statement that a “patient” approach to raising rates is consistent with its previous guidance that it expected to keep its key rate near zero for a “considerable time.”

At her news conference, Yellen stressed that the strength of U.S. economic data and the level of inflation, not a calendar date, will dictate when it will raise rates. She said the Fed was making no changes in its policy and foresees no rate increase during the first quarter of 2015.

“The Fed is sending the message that the broader U.S. economy is on the path toward healing,” said Steven Ricchiuto, chief economist at Mizuho Securities. “They don’t know how fast it will heal, but it’s on the mend.”

Uncertainty about when the economy will fully heal from the ravages of the Great Recession, which officially ended 5½ years ago, is why the Fed’s policy statements remain vague, Ricchiuto added.

Stock investors signaled their approval of the Fed’s guidance that rates will likely stay low for at least several more months. The Dow Jones industrial average, which had risen about 160 points before the Fed issued its statement, was up nearly 300 points later in the afternoon.

“There was no signal that rates are on the cusp of liftoff,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

Most economists think the Fed’s first rate increase will occur in June as long as its inflation outlook doesn’t remain persistently below its target rate of 2 percent.

In an updated economic forecast Wednesday, the Fed lowered its inflation forecast for next year to between 1 percent and 1.6 percent.

The action was approved on a 7-3 vote. The three dissents from the majority view reflected the sharp battles inside the Fed as it tries to transition from an extended period of ultra-low rates to a period in which it will start to raise rates. The Fed has not raised rates in more than eight years.

The dissents included Presidents Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia Fed, who have long stressed the need for the Fed to prevent high inflation over the need to maximize employment.

But Narayana Kocherlakota, president of the Fed’s Minneapolis regional bank, also dissented. He has pushed for greater efforts to boost job growth.

The Fed’s decision to continue to say it expects to maintain record-low rates for a “considerable time” was a mild surprise. Most economists had expected it to drop that phrase in favor of saying it would be “patient” in assessing the economy’s ability to withstand higher rates. In the end, the Fed’s statement used both phrases.

Since the Fed’s last meeting, the job market and other sectors of the economy have strengthened. Employers added 321,000 jobs in November, sustaining the healthiest year for job growth since 1999. The current 5.8 percent unemployment rate is close to the 5.2 percent to 5.5 percent range that the central bank considers maximum employment.

The Fed is following the pattern it set in 2004 when it moved away from the phrase “considerable period” in January of that year and substituted “patient.”: It followed that in June with the first rate hike.

The Fed’s key short-term rate has been at a record low near zero since December 2008. When the Fed does begin raising rates, the expectation is that the rate increases will be a gradual process, with small quarter-point moves that will leave consumer and business interest rates at historically low levels for a considerable period.

At the previous meeting in October, the Fed ended its third round of bond purchases, which were intended to keep down long-term borrowing rates. Those bond purchases have pushed the Fed’s holdings to close to $4.5 trillion — more than four times the level of the Fed’s balance when the financial crisis hit in the fall of 2008.

While it is not adding to those bond holdings, the Fed is maintaining the current record-high level, which is continuing to exert downward pressure on long-term rates.

 

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

 

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