Fed Creeps Closer to Higher Rate That May Not Arrive for Months

  • Wednesday, March 18, 2015

By Binyamin Applebaum – New York Times

WASHINGTON — The Federal Reserve on Wednesday moved to the verge of raising interest rates for the first time since the economy fell into recession more than seven years ago, even as officials suggested that the Fed might not pull the trigger until well into the second half of the year.

In a statement released after a two-day meeting of its policy-making committee, the Fed said that it would consider raising its benchmark rate as early as June, and it removed from the statement a promise that it would be “patient.”

Yet the Fed tempered that message on Wednesday, including the release of economic forecasts by its senior officials that showed they now think the unemployment rate can still fall significantly without setting off higher inflation. That conveyed an impression that Fed officials may feel less urgency about raising interest rates so soon.

“Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient,” Janet L. Yellen, the Fed’s chairwoman, said at a news conference after the statement’s release. Ms. Yellen said the Fed was not declaring an intention to raise rates in June, “although we can’t rule that out.”

Her remarks suggested that borrowers have a few more months to take advantage of exceptionally low interest rates on mortgages and car loans, while savers face a few more months of exceptionally meager returns on their low-risk investments. And even after the Fed raises its crucial interest rate, borrowing costs may well remain comparatively low well into the future.

Investors celebrated like the recipients of a last-minute reprieve.

The Standard & Poor’s 500-stock index rose 1.2 percent to close at 2,099.50. Bond prices also jumped, driving the yield on the benchmark 10-year Treasury bond to its largest one-day decline since October. The yield fell 0.13 points to 1.92 percent.

Evan A. Schnidman, chief executive of Prattle Analytics, which analyzes central bank communications, said the Fed surprised many investors because the public remarks of Fed officials over the last year have consistently pointed to an earlier start date for rate increases than the Fed’s official statements.

“Although they are individually eager to normalize policy, they are collectively reticent about the possibility of raising rates prematurely,” Mr. Schnidman said.

The march toward higher rates may be slow, but it still looks all but certain to begin at some point this year. That reflects the Fed’s optimism that the economy no longer needs quite as much help from central bank stimulus and a sense of fatigue with the Fed’s long-running campaign to encourage faster economic growth.

Many Americans are still struggling to find good jobs, while the sluggish pace of inflation suggests that the economy still has room to grow more quickly without setting off alarm bells that prices will escalate beyond a comfortable level. The Fed acknowledged in its statement that growth had “moderated somewhat” in recent months, and that inflation had sagged even further below its 2 percent target, a level most economists consider appropriate to a healthy economy.

There are also growing concerns that the stronger dollar, which has been rising partly on expectations that the Fed will raise rates while other central banks are cutting them, will hurt American exports and reduce corporate investment. The rise of the dollar also appears to be worsening the weakness of inflation. Low inflation is a sign of economic weakness and can also be a cause of it, for example, by making it harder to repay debts.

The forecasts published by the Fed showed that 15 of the 17 members of the policy-making committee expect to raise the Fed’s benchmark rate this year. Those projections showed that on average they expect two increases, to roughly 0.75 percent. The Fed has held short-term rates near zero since December 2008.

“I think some of the headwinds that have long been holding the economy back are beginning to recede,” Ms. Yellen said at her news conference. Monetary policy exerts a gradual influence on economic conditions, so the Fed must anticipate the trajectory of growth when it makes policy. Ms. Yellen said officials were inclined to raise rates because they expected continued improvement in the labor market and a rebound in inflation that would move it closer to its desirable level.

In place of its recent promise to remain “patient” in deciding when to start raising rates, the committee’s statement said that the Fed would act “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

The statement said the Fed “remains unlikely” to act at its next meeting, in April, turning the attention of investors to subsequent meetings. A number of analysts said they viewed the Fed’s September meeting as the most likely date.

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The Prattle Team,

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