Fed promises ‘patient’ approach to rate hikes

December 18, 2014 11:21 pm | Updated 11:21 pm IST - WASHINGTON:

Janet Yellen.

Janet Yellen.

The Federal Reserve is edging closer to raising interest rates from record lows given a strengthening U.S. job market and economy. But it says it will be ‘patient’ in determining when to raise rates.

The Fed said on Wednesday after a policy meeting that such an approach is consistent with its previous guidance that it expected to keep its benchmark rate near zero for a ‘considerable time’.

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

Stock investors signalled 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 about 274 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.

The central bank gave no specific guidance on when the first rate hike might occur. Most economists think the first increase will occur in June as long as the Fed’s inflation outlook doesn’t remain persistently below its target rate of 2 per cent.

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

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 maximise 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 favour 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 5.8 per cent unemployment rate is close to the 5.2 per cent to 5.5 per cent 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.

0 / 0
Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.