WASHINGTON – Federal Reserve officials are about to address a question investors have been mulling for weeks:
Do they remain “patient” about raising interest rates?
The answer will come around 2 p.m. Eastern time Wednesday, when the Fed will issue a statement after its latest policy meeting ends and in a news conference to follow with Chair Janet Yellen.
Since December, the Fed has said it can be “patient” in beginning to raise a key rate from a record low near zero. Most analysts think it will drop “patient” from its statement to signal it’s moving toward a rate increase, perhaps as soon as June, given the strengthening job market. A rate hike would ripple through the economy and could slow borrowing and possibly squeeze stocks and bonds.
Other economists think that whether or not the Fed drops “patient,” it will say that any move to raise rates will reflect the latest data and that the central bank will remain flexible. Key sectors of the economy have been less than robust of late, and inflation remains far below the Fed’s target rate. Some analysts foresee no rate hike before September. A few predict none before year’s end at the earliest.
Complicating the decision is a surging U.S. dollar, which is helping keep inflation excessively low and posing a threat to U.S. corporate profits and possibly to the economy. A rate increase could send the dollar even higher.
Nervous investors have been selling stocks out of concern that a rate increase is coming soon.
“I think the odds are better than 50-50 that the Fed … will drop the word ‘patient’ at the March meeting, and that would put an initial rate hike in play, perhaps as early as the June meeting,” said David Jones, author of several books about the Fed.
Historically, the Fed raises rates as the economy strengthens in order to control growth and prevent inflation from overheating. Over the past 12 months, U.S. employers have added a solid 200,000-plus jobs every month. And unemployment has reached a seven-year low of 5.5 per cent, the top of the range the Fed has said is consistent with a healthy economy.
The trouble is that the Fed isn’t meeting its other major policy goal — achieving stable inflation, which it defines as annual price increases of around 2 per cent. According to the Fed’s preferred inflation gauge, prices rose just 0.2 per cent over the past 12 months. In part, excessively low U.S. inflation reflects sinking energy prices and the dollar’s rising value, which lowers the prices of goods imported to the United States.
It isn’t just inflation that remains below optimal levels. Though the job market has been strong, the overall economy has yet to regain full health. The economy slowed to a tepid 2.2 per cent annual rate in the October-December quarter, and economists generally think the current quarter might be even weaker.
Manufacturers are struggling with falling exports, and consumers — the drivers of the economy — have seemed reluctant to spend their windfall savings from cheaper energy. What’s more, pay for many workers remains stagnant, and there are 6.6 million part-timers who can’t find full-time jobs — nearly 50 per cent more than in 2007, before the recession began.
The Fed’s outlook on the economy will be updated when it releases its latest forecasts Wednesday.
In testimony to Congress last month, Yellen cautioned that even when “patient” is dropped, it won’t necessarily signal an imminent rate hike — only that the Fed will think the economy has improved enough for it to consider a rate increase on a “meeting-by-meeting basis.”
Some economists say the Fed may tweak its policy statement to signal that a higher inflation outlook would be needed before any rate hike. And they expect the Fed to go further in coming months to ready investors for the inevitable.
“The process is going to be glacial,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “They want to prepare the markets for change, but they don’t want to scare them.”