US Fed makes no policy changes, says can be 'patient' over interest rates

Federal Reserve Board chairman Janet Yellen speaks during a news conference Dec 17, 2014 in Washington, DC. The US Federal Reserve made no changes to its monetary policy Wednesday, saying it can remain “patient” before moving to raise intere
Federal Reserve Board chairman Janet Yellen speaks during a news conference Dec 17, 2014 in Washington, DC. The US Federal Reserve made no changes to its monetary policy Wednesday, saying it can remain “patient” before moving to raise interest rates and normalising its easy-money stance. -- PHOTO: AFP

WASHINGTON (AFP) - The US Federal Reserve made no changes to its monetary policy Wednesday, saying it can remain “patient” before moving to raise interest rates and normalising its easy-money stance.

In a policy statement at the end of a two-day meeting, the Fed left in place expectations that it would begin raising interest rates only in the middle of 2015, downplaying thoughts that it might come earlier than that because of the strength of the US economy.

The Fed left its key interest rate, the federal funds rate, at the 0-0.25 per cent level, where it has been for six years to help the US emerge from deep recession.

It modestly upgraded projections for the economy, seeing unemployment falling next year to as low as 5.2 per cent and inflation staying between 1.0 per cent and 1.6 per cent.

Its forecast for growth in 2015 stayed at 2.6-3.0 per cent, after an upgraded 2.3-2.4 per cent this year.

But against expectations, the Fed’s policy arm, the Federal Open Market Committee (FOMC), stuck to language that it would only begin normalization “a considerable time” after the end of quantitative-easing stimulus in October just gone.

Instead of dropping that message and signaling an interest-rate hike could possibly come earlier than the projected mid-2015, the FOMC suggested that if needed, it could hold off even longer.

Projections by members of the committee showed them expecting a pickup in interest rates later than they did three months ago.

“Based on its current assessment, the Committee judges that it can be patient in beginning to normalise the stance of monetary policy,” the FOMC said.

Janet Yellen, the Fed chair, repeatedly stressed that the mention of patience was not a change in FOMC policy views, but just updated its stance as the economy slowly improves.

“This new language does not represent a change in our policy intentions and is fully consistent with our previous guidance, which stated that it likely will be appropriate to maintain the current starting range for the federal funds rate for a considerable time after the end of our asset purchase program,” she said at the end of the two-day Fed policy meeting.

“But with that programme having ended in October and the economy continuing to make progress toward our objectives, the committee judged that some modifications for guidance is appropriate at this time.”

“Employment is rising at a healthy rate and the US economy is strengthening,” Yellen said.

On the other hand, she noted, “There is room for further improvement, with too many people who want jobs being unable to find them, too many who are working part-time but would prefer full-time work, and too many who have given up searching for a job but would likely do so if the labour market were stronger.”

STOCKS JUMP

Some analysts said the language shift was only marginal, in terms of projecting when the Fed will begin hiking the Fed funds rate.

“The ‘patient’ wording is reminiscent of the change in language in 2004 – five months before tightening began,” noted Jim O’Sullivan, chief US economist at High Frequency Economics.

“With an expected funds rate of over 1 per cent by year-end, officials are implicitly suggesting a first move by around mid-year.”

Wall Street stocks jumped further after the Fed’s updated policy announcement, which promised ultra-low interest rates through next year.

Near 1945 GMT, the Dow Jones Industrial Average was up 1.24 per cent and the S&P 500 rose 1.44 per cent.

The dollar meanwhile pushed higher, to US$1.2375 against the euro and to 118.22 yen.