The Federal Reserve inched closer to raising short-term interest rates Wednesday, dropping a promise to be “patient” in hiking rates from its monetary policy announcement.
The decision announced after the central bank’s monetary policy meeting in Washington raises expectations that the Fed will begin tightening monetary policy this year, possibly as soon as June.
When exactly the rate increase will come will depend on economic growth and inflation the rest of the year, the Fed reiterated Wednesday, as well as the threat posed to the U.S. by weakness in the global economy.
The Fed said that it would be appropriate to raise rates when it has seen “further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective,” the Fed’s statement said.
Federal Reserve Chairwoman Janet Yellen said in congressional testimony in February that, once the guidance that the Fed would be “patient” was dropped, a rate increase “could be warranted at any meeting.”
Bond prices before Wednesday’s announcement indicated that investors expected the Fed to raise its short-term interest rate target around September. Wednesday’s move suggests that the move could come as early as the Fed’s June meeting. Stock markets rose in early reaction to Wednesday’s announcement.
Successfully raising rates would mark an end of an era for the Fed. It first lowered rates to zero in December 2008, as the financial crisis threatened to cause a depression. Unable to lower rates any further, the Fed turned to unconventional tools to try to stimulate the economy.
Those measures included a series of bond purchases, known as quantitative easing, that have boosted its balance sheet from just over $900 billion before the crisis to $4.5 trillion now. The Fed also relied on promises to keep rates lower for longer to try to boost asset prices and encourage spending.
The overnight interest rates targeted by the Fed influence interest rates throughout the economy, on everything from credit cards to mortgages.
In recent months, the jobs outlook has improved enough that the Fed is ready to step away from emergency-era policy.
The unemployment rate, at 5.5 percent in February, is within the range that Fed officials guessed in December is consistent with a healthy economy. Job gains have accelerated throughout the winter.
Other economic indicators, however, have not kept pace, including fourth-quarter gross domestic product and more recent retail sales. The Fed’s statement Wednesday acknowledged that growth may have slowed in the first quarter of 2015 and that the rising dollar has crimped exports.
Fed officials also marked down their expectations for growth in 2015 and beyond in new projections released Wednesday. They now see gross domestic product rising just 2.3 percent to 2.7 percent in 2015, down from as high as 3 percent from their June projections.
Most glaringly, inflation has been moving in the wrong direction, from the Fed’s perspective. The Fed aims for 2 percent annual inflation. Amid a massive decline in the price of oil and a surge in the strength of the dollar, inflation has turned negative in recent months. The Consumer Price Index for January showed that inflation was negative 0.2 percent in January.
Yellen and other Fed officials have said that the oil-led slowdown in inflation is likely to prove temporary and that it will head back up toward the 2 percent target as the economy improves and unemployment continues to fall. That assessment was repeated in Wednesday’s announcement, although it also acknowledged that bond market expectations of long-term inflation appear to have fallen.
It could take time for inflation to rise, however. Fed officials’ projections show inflation remaining below 1 percent at the end of 2015 and only rising to 2 percent by 2017.
Despite the downgraded projections of economic growth and inflation, Yellen and company now have a more positive view of employment. They see unemployment falling as low as 5 percent this year and now estimate that the longer-term unemployment rate consistent with a health economy is between 5 and 5.2 percent, down from their earlier projections.
Two members of the Fed see economic growth and inflation as sluggish enough to hold off on rate hikes until 2016, the projections, which are not matched to individual officials’ names, show.
Nevertheless, there were no dissents among the 10 Fed governors and regional bank presidents voting on Wednesday’s actions.
