US Fed loses 'patience' on rate hike

TREADING SOFTLY: Dr Yellen, the Fed chairman, speaking to the press following the FOMC meeting in Washington on Wednesday. She said the Fed would exercise caution with regard to interest rates, considering the dimmer growth forecasts.


    Mar 20, 2015

    US Fed loses 'patience' on rate hike


    THE United States Federal Reserve dropped its pledge to remain "patient" on raising interest rates on Wednesday, signalling a possible mid-year federal funds rate hike after over six years at the zero level.

    But Fed chairman Janet Yellen stressed that policymakers see US economic growth prospects as more muted than they did just three months ago, and will step cautiously as they move out of crisis stance.

    That means, as indicated by fresh forecasts from the Fed, that even if it embarks on normalising monetary policy with a June, July or September rate increase, rates will remain at extraordinarily low levels well into next year.

    The US central bank struck 0.3 percentage points from its growth forecast for this year, to around 2.3 per cent to 2.7 per cent, and significantly lowered its inflation outlook on Wednesday, to a weak 0.6 per cent to 0.8 per cent range.

    The Federal Open Market Committee (FOMC) said in a fresh policy statement that growth had "moderated somewhat" since its January meeting, in part because American households have scaled back spending.

    "Just because we removed the word 'patient' from the statement doesn't mean we're going to be impatient," Dr Yellen said after the two-day FOMC meeting.

    While the job market has strengthened and unemployment fallen to 5.5 per cent, she noted that consumer spending has slipped, the housing sector is sluggish, inflation has declined rather than increased, wages are flat and the stronger dollar has hurt US exports.

    The view of many Fed officials, Dr Yellen told reporters, is that "the residual effects of the financial crisis... are likely to continue to constrain spending and credit availability for some time".

    The Fed's stress on caution even as it stepped closer to raising interest rates took pressure off global markets expecting a more aggressive position.

    Both the International Monetary Fund and the Organisation for Economic Cooperation and Development had warned this week about the turmoil that could result in the weak global economy from Fed tightening.

    The FOMC had been widely expected to drop from the policy statement the insistence that it "can be patient" before increasing the Fed funds rate.

    That phrase has stood between FOMC policymakers' caution and firm commitment to take the step for an initial rate increase this year.

    Dr Yellen said several times that removing that phrase would signal a possible hike within two or more FOMC meetings, which points to June at the earliest.

    Reiterating that point, the FOMC virtually nixed any increase in April in its statement.

    But beyond that, there was no commitment.

    "Let me emphasise, however, that the timing of the initial increase in the target range will depend on the committee's assessment of incoming information," Dr Yellen said.

    "Today's modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase."

    "This is a classic good cop, bad cop situation," said Michael Gregory of BMO Capital Markets.

    "With wage growth still low, lower oil prices pulling down inflation, and the dollar strong," he said, "we might ourselves have to be patient before we see the inevitable lift-off of Fed policy rates."

    Chris Low of FTN Financial noted that Dr Yellen nevertheless is conscious of the danger of tightening policy too late to contain inflation.

    But, he added: "The FOMC wants to see further labour market improvement and must still be confident inflation will return to 2 per cent in the medium term to hike rates when the time comes."

    The likelihood of a slower rise in rates sent US bond yields and the dollar sinking while stocks jumped.

    The US central bank's revisions effectively align policymakers with investors, who have mostly refused to believe a rate hike will come until September or later.

    Wall Street's top economists, who have long called for a June rate hike, now point to September, according to a Reuters poll.

    Said Maritza Cabezas and Georgette Boele, economists at ABN Amro Group Economics: "The Fed statement shows that FOMC members will be data dependent but are tending towards a slower pace.

    "The chances that the Fed waits beyond June (our current base case) to raise rates have clearly increased. In addition, the rate hike cycle looks likely to be slow once it does start."