WASHINGTON – After holding interest rates at record lows for more than six years, the Federal Reserve still isn’t ready to start raising them.
The Fed signalled Wednesday 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.
The Dow Jones industrial average, which had been down nearly 100 points before the statement was issued, closed up 227 points, or 1.3 per cent. The yield on the 10-year Treasury note, which influences long-term mortgage rates, tumbled from 2.04 per cent just before the Fed’s announcement to 1.92 per cent.
In its statement and later in 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 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 Fed rate increase would likely send the 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. Complicating its decision is that other big central banks — from Europe to Japan to India — are either cutting rates or embarking on stimulus programs to try to boost their struggling economies.
At her news conference, Yellen stressed that while the Fed had removed “patient” to describe its approach to raising rates, it still hadn’t decided when to begin raising them.
“Just because we removed the word ‘patient’ from the statement,” Yellen said, “doesn’t mean we’re going to be impatient.”
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 noted that the economy, which it previously said was growing solidly, has “moderated somewhat.”
Patrick Maldari, a senior fixed-income specialist at Aberdeen Asset Management, said the Fed appears to be in no hurry to raise short-term rates.
“They went out of their way to talk about weakness in export growth, weakness in energy prices,” Maldari said.
Michael Gregory, deputy chief economist at BMO Capital Markets, said he foresees a rate increase in the second half of the year. But he cautioned, “There is now some probability that the Fed does nothing this year.”
Employers have added 200,000-plus jobs each month for a year. Unemployment is at a seven-year low of 5.5 per cent. Hiring is far outpacing the job gains in overseas economies.
Yet Yellen suggested that the broad pay increases that are normally associated with steady job growth may not occur anytime soon. She said, though, that the Fed wouldn’t 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.
Since December, the Fed had said it could be “patient” in beginning to raise its benchmark rate from near zero. Most analysts had said that dropping “patient” from its statement would signal that the Fed was moving toward a rate increase, perhaps as soon as June. A rate hike would ripple through the economy and could slow borrowing and possibly squeeze stocks and bonds.
On Wednesday, the Fed’s statement 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 dollar. A rising dollar makes U.S. 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 per cent objective over the medium term.”
On Wednesday, the Fed also downgraded its quarterly economic forecasts. It cut its estimate of growth this year to a range of 2.3 per cent to 2.7 per cent, from an estimate of 2.6 per cent to 3 per cent in its previous forecast in December. 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 may move slowly in raising rates.
Officials reduced their estimate of the unemployment rate that they think is consistent with a healthy economy to a range of 5 per cent to 5.2 per cent. That’s down from a previous range of 5.2 per cent to 5.5 per cent. Unemployment now stands at 5.5 per cent, the top of the previous range.