The Federal Reserve on Wednesday moved a step closer to hiking rates for the first time since 2006, but downgraded its economic growth and inflation projections, signalling it is in no rush to push borrowing costs to more normal levels.
The US central bank removed a reference to being ‘patient’ on rates from its policy statement, opening the door wider for a hike in the next couple of months while sounding a cautious note on the health of the economic recovery.
Fed officials also slashed their median estimate for the federal funds rate – the key overnight lending rate – to 0.625 per cent for the end of 2015 from the 1.125 per cent estimate in December.
The cut to the so-called ‘dot plot’, together with other economic concerns cited by the Fed, sent a more dovish message than investors were expecting, and pushed market bets on the central bank’s rate ‘lift-off’ from mid-year to the fall.
Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient
“Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient,” Fed chair Janet Yellen said in a press conference after Wednesday’s statement.
Stocks on Wall Street surged and oil prices jumped as much as 5 per cent after the Fed statement. The dollar tumbled against other major currencies and the US 10-year Treasury yield dipped below 2 per cent for the first time since March 2.
In its quarterly summary of economic projections, the Fed cut its inflation outlook for 2015 and reduced expected US economic growth. The policy statement repeated its concern that inflation measures were running below expectations, weighed down in part by falling energy prices.
“I just don’t see any price or wage pressure out there,” said Craig Dismuke, chief economist for Vining Sparks. “June is not off the table but it’s unlikely. September is the most likely time for the first rate hike. They might get one hike in this year, maybe two.”
The Fed noted that a rate increase remained “unlikely” at its April meeting and said its change in rate guidance did not mean it has decided on the timing for a rate hike. Yellen told reporters that a June move could not be ruled out.
The Fed statement, however, allowed enough flexibility for the central bank to move later in the year, stressing that any decision would depend on incoming data.
“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium-term,” the Fed said.
It had previously said it would be patient in considering when to bring monetary policy back to normal. (Reuters)
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