Fed opens door for rate rise amid slower growth

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WASHINGTON, D.C.: The Federal Reserve dropped its pledge to remain “patient” on raising interest rates on Wednesday (Thursday in Manila), signaling a possible midyear federal funds rate hike after over six years at the zero level.

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But Fed Chair 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 normalizing monetary policy with a June, July or September rate increase, rates will remain at extraordinarily low levels well into 2016.

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

The Federal Open Market Committee said in a fresh policy statement that growth had “moderated somewhat” since its January meeting, in part because American households have tailed back spending.

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

2008 crisis still hurting
While the jobs market has strengthened and unemployment fallen to 5.5 percent, 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, 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 Organization for Economic Co-operation 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.

Yellen said several times that removing that phrase would signal a possible hike within two or more FOMC meetings, which would point 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 emphasize, however, that the timing of the initial increase in the target range will depend on the committee’s assessment of incoming information,” 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,” quipped Michael Gregory at BMO Capital Markets.

With wages 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 liftoff of Fed policy rates.”

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

But, he added, “The FOMC wants to see further labor market improvement and must still be confident inflation will return to two percent 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.

Down modestly before the FOMC policy statement at 6 p.m. local time, the Dow Jones Industrial Average finished 1.3 percent higher, and the broad-based S&P 500 gained 1.2 percent.

The dollar meanwhile fell past the $1.101 per euro level from $1.064 prior to the policy announcement. Later it hovered around $1.087.

AFP

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