The Federal Reserve took a step closer to raising interest rates and leaving behind crisis-era monetary policy Wednesday.
The central bank signaled in its monetary policy statement that it is preparing to raise short-term interest rates from zero for the first time since 2008. The Fed dropped the guidance that it won’t raise rates for a “considerable time,” and instead said that it would be “patient” in planning the move.
That change in language will be interpreted as a sign that the first rate hikes are now closer than they were before. Currently, markets anticipate that the first rate hike will come sometime after June of 2015.
Nevertheless, the Fed tried to downplay the significance of the change, saying that the news language is “consistent” with its previous statements.
The Fed’s announcement indicates that rising concerns about the effects of falling oil prices and inflation and increased volatility overseas were not enough to convince Chairwoman Janet Yellen and other officials that the U.S. labor market recovery has veered off course.
The unemployment rate, at 5.8 percent in November, is on track to fall to near the levels that the Fed believes is consistent with a healthy economy, and 2014 has been the strongest year for job growth since 1999.
The announcement was released after Yellen and the Fed’s monetary policy committee concluded a two-day meeting in Washington Wednesday. Yellen is scheduled to address the press later Wednesday afternoon.
Three of the 10 voting members of the monetary policy committee voted against the statement, all for different reasons.
Federal Reserve Bank of Dallas president Richard Fisher dissented on the grounds that the Fed should be moving up the date of liftoff for interest rates. Charles Plosser, president of the Philadelphia regional bank, voted no on the grounds that the decision should be based less on the passage of time and more on incoming economic data. Both Fisher and Plosser are considered more “hawkish” members of the Fed, more inclined to worry about inflation.
Federal Reserve Bank of Minneapolis president Narayana Kocherlakota dissented on the grounds that the Fed is running the risk of allowing expected inflation to fall below the Fed’s 2 percent target.
All three dissenting presidents will rotate out of the Fed’s monetary policy committee at the end of the year.
The Fed’s statement noted that inflation expectations reflected in bond markets have slipped in recent weeks. But it also stated that officials expect inflation to rise gradually toward 2 percent “as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”
In the official projections released alongside the announcement, officials estimated that inflation would rise to between 1.6 percent and 1.9 percent in 2015, before ultimately stabilizing at 2 percent in the long run.
The projections also marked up economic growth for 2014, following an unexpectedly strong Gross Domestic Product report for the third quarter. Fed members now see growth clocking in at between 2.3 and 2.4 percent for the year, up from 2 to 2.2 percent.
