Fri, Mar 20, 2015 page15

• Fed eyes further gains before rate hike

  ‘NOT IMPATIENT’: Janet Yellen said that despite the removal of the term ‘patient’ to describe the US central bank’s approach to raising rates, it had not made a firm decision

  • AP, WASHINGTON
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  After holding interest rates at record lows for more than six years, the US Federal Reserve still is not ready to start raising them.

  The Fed on Wednesday signaled that it needs the job market to improve further and inflation to rise above low levels before it begins nudging borrowing rates up. Even then, it suggested it will do so only very gradually.

  The statement the Fed issued after its latest policy meeting seemed to catch investors by surprise in suggesting that a rate increase might be further off than many had assumed. Stock prices jumped and bond yields fell on Wednesday.

  Most Asian equity markets outside Japan rallied yesterday after Fed comments cooled expectations of an early rate hike, while the euro and yen retreated against the US dollar after racking up big gains in New York.

  In its statement and later in Fed Chair Janet Yellen’s news conference, the Fed expressed concerns despite the economy’s steady growth. Yellen pointed to lower energy prices and a surging US dollar, which is helping keep inflation excessively low and posing a threat to US corporate profits and possibly to the economy. A Fed rate increase would likely send the US dollar even higher.

  At the same time, the Fed at least opened the door to a rate increase later this year by no longer saying it will be “patient” in starting to raise its benchmark rate. Yellen said that while the Fed had removed “patient” to describe its approach to raising rates, it still had not decided when to begin raising them.

  “Just because we removed the word ‘patient’ from the statement, does not mean we are going to be impatient,” Yellen said.

  The Fed has kept its key short-term rate near zero since late 2008 to try to bolster the economy after a devastating financial crisis and recession. In its statement, the Fed said that the economy, which it previously said was growing solidly, has “moderated somewhat.”

  Employers have added more than 200,000 jobs each month for a year. Unemployment is at a seven-year low of 5.5 percent. Hiring is far outpacing the job gains in overseas economies.

  However, Yellen suggested that the broad pay increases that are normally associated with steady job growth might not occur anytime soon. She said, though, that the Fed would not necessarily wait for wages to rise at a faster pace before it raises its key rate from its near-zero level.

  “We may not see wage growth pick up,” she told reporters.

  The Fed’s statement on Wednesday was approved on a 10-0 vote.

  In its characterization of the economy, the statement said export growth has weakened, a trend that partly reflects a stronger US dollar. A rising US dollar makes US goods costlier overseas.

  “I certainly expect net exports to serve as a notable drag this year,” Yellen said.

  The statement said that before raising rates, Fed officials want to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

  The Fed also downgraded its quarterly economic forecasts. It cut its estimate of growth this year to a range of 2.3 percent to 2.7 percent, from an estimate of 2.6 percent to 3 percent in its previous forecast in December last year. It was an acknowledgement that some key indicators have been weaker than expected in recent months.

  The Fed also forecast that the unemployment rate can now fall further without spurring inflation, a sign that it might move slowly in raising rates.

  US officials reduced their estimate of the unemployment rate that they think is consistent with a healthy economy to a range of 5 percent to 5.2 percent. That is down from a previous range of 5.2 percent to 5.5 percent. Unemployment now stands at 5.5 percent, the top of the previous range.
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