WASHINGTON (Reuters) – The Federal Reserve on Wednesday offered a strong signal that it was on track to raise interest rates sometime next year, altering a pledge to keep rates near zero for a “considerable time” in a show of confidence in the US economy.
Closing out a two-day meeting against a backdrop of solid domestic growth but trouble overseas, the US central bank said it would take a “patient” approach in deciding when to bump borrowing costs higher. Fed Chair Janet Yellen told a news conference that “patient” meant the policy-setting Federal Open Market Committee was unlikely to hike rates for “at least a couple of meetings,” meaning April of next year at the earliest.
US stock markets and bond yields rose as investors digested a statement that evinced faith in the economy while still projecting a slow-going approach to rate hikes. The dollar rallied broadly against major currencies.
After some initial volatility, futures markets continued to point to a rate rise in September, while 13 of 19 big Wall Street firms polled by Reuters said they expected an increase by June, in line with results from a November survey.
The Fed has held benchmark overnight rates near zero since December 2008.
“Based on its current assessment, the committee judges that it can be patient in beginning to normalise the stance of monetary policy,” the Fed said. Significantly, it said the statement was “consistent” with its prior guidance that it would wait a “considerable time” before hiking rates.
Eric Green, an analyst with TD Securities in New York, said Yellen’s definition of “patient” was “less dovish than a reading of the statement would suggest.”
“In effect, it is open season after the March FOMC meeting,” he said. Yellen told reporters that even with a sharp drop in energy costs, the Fed felt confident that inflation would eventually turn higher and approach the central bank’s two per cent target, and she suggested officials would feel comfortable raising rates as long as other economic signals stayed strong and expectations of future inflation held firm.
“By the time of liftoff, participants expect to see some further decline in the unemployment rate and additional improvement in labour market conditions,” Yellen said.
After a week of turbulence in global financial markets, the US central bank looked firmly beyond economic difficulties in the euro zone, Japan and Russia and offered a mostly upbeat assessment of the US economy’s prospects.
Updated quarterly projections, presented as ranges that exclude the three highest and lowest individual forecasts, showed policymakers continue to expect the US economy to grow between 2.6 per cent and three per cent next year. They foresee the unemployment rate, currently at a six-year low of 5.8 per cent, moving down to an average of between 5.2 per cent and 5.3 per cent toward the end of next year, a bit lowerthan in their previous forecasts in September and in line with what they think is in keeping with full employment. Fed officials, however, acknowledged inflation was likely to slow next year to between one per cent and 1.6 per cent, the result of a cratering in oil prices. But core inflation, which excludes volatile food and energy costs, is projected to dip only a bit next year before turning higher to close in on the Fed’s target by the end of 2016.