WASHINGTON (Reuters) – The Federal Reserve on Wednesday ended its monthly bond purchase programme and dropped a characterisation of US labour market slack as “significant” in a show of confidence in the economy’s prospects.
In a statement after a two-day meeting, the central bank largely dismissed recent financial market volatility, dimming growth in Europe and a weak inflation outlook as unlikely to undercut progress toward its unemployment and inflation goals.
“On balance, a range of labour market indicators suggests that underutilisation of labour resources is gradually diminishing,” the Fed’s policy panel said in an important departure from prior statements, which had described the slack as “significant.”
“The committee continues to see sufficient underlying strength in the broader economy,” it said.
US stocks added to earlier losses after the statement but came back to close down only marginally, while the yield on the five-year US Treasury note jumped, putting it on track for its biggest one-day increase since mid-March. The yield on the benchmark 10-year US Treasury note was little changed.
The dollar rose to a three-week high against a broad basket of currencies as traders pulled forward expectations of when the Fed would eventually raise interest rates.
Rate futures shifted to show better-than-even odds of a rate increase in September 2015; previously, they had pointed to a hike in October. The Fed has held rates near zero since December 2008 and has more than quadrupled its balanced sheet to $4.4 trillion through three separate asset purchase programmes.
“The market is saying that the Fed has now stepped closer to tightening interest rates because of the labour market,” said Andrew Wilkinson, chief market analyst at Interactive Brokers LLC in Greenwich, Connecticut.
The Fed also added broad, flexible language that ties the timing and pace of any future rate hike to incoming economic data, as Fed Chair Janet Yellen has stressed in recent remarks.
While the central bank retained its basic guidance that overnight borrowing costs would remain near zero for a “considerable time” following the end of bond purchases this month, the new phrase marks a turn towards a new regime.
“If incoming information indicates faster progress toward the committee’s employment and inflation objective 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.
The changes in language seemed to accommodate the concerns of Fed officials worried the central bank was falling out of step with improvements in the economy. Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, who dissented at the previous meeting last month, voted in favor of the statement this time.