U.S. Federal Reserve renews zero rate pledge, but hints at steeper rate hike path

WASHINGTON (Reuters) - The U.S. Federal Reserve on Wednesday renewed a pledge to keep interest rates near zero for a "considerable time" but it issued projections that suggested it may raise borrowing costs a bit quicker than it had been thinking a few months ago.

Many economists and traders had expected the central bank to alter the rate guidance it has provided since March, given generally improving data on the economy's performance. But the Fed repeated its assurance that rates would stay ultra-low for a "considerable time" after a bond-buying stimulus program wraps up.

In a statement after a two-day meeting, it announced a further US$10 billion (S$12.63 billion) reduction in its monthly purchases, leaving the program on course to be shuttered next month.

"While the much analysed phrase 'considerable time' remained in the FOMC statement, the newly announced scheme for interest rate normalization shows that higher rates are in the cards,"said John Kilduff, a partner at Again Capital LLC in New York.

The policy-setting Federal Open Market Committee also repeated its assessment that a "significant" amount of slack remains in the U.S. labour market, a further sign it is no rush to raise benchmark borrowing costs.

"On balance, labour market conditions improved somewhat further; however, the unemployment rate is little changed," the FOMC said in its statement after a two day meeting.

Dallas Federal Reserve Bank President Richard Fisher and Philadelphia Fed chief Charles Plosser dissented, arguing the guidance on rates could tie the central bank's hands if it felt it had to move more quickly to tighten monetary policy.

Stocks were a little changed after the statement, while the dollar hit its highest level against he Japanese yen since September 2008. Yields on U.S. Treasury bonds rose as traders moved to price in the possibility of higher future rates.

A fresh set of quarterly interest rate projections suggested officials were positioning themselves for a potentially faster pace of rate hikes than they had envisioned in June, when the last set of forecasts were released.

For the end of next year, the median projections was 1.375 per cent, compared to 1.125 per cent in June, while the end-2016 projection moved up to 2.875 per cent from 2.50 per cent. For 2017, the median stood at 3.75 per cent - the level officials see as neither stimulative nor restrictive.

The Fed also released a new blueprint for how it plans to exit the extraordinary monetary stimulus it put in place to combat the 2007-09 financial crisis and recession. It said it expects to end or phase out the reinvestment of proceeds from its massive bond holdings some time after it begins raising rates, depending on the state of the economy.

In addition, it said it would move its target for the overnight federal funds rate by adjusting the amount it pays banks for excess reserves they hold at the central bank. Another tool, so-called overnight reverse repurchase agreements, would play a supporting role.

Earlier on Wednesday, the government released data that showed consumer prices notched their first decline in nearly 1-1/2 years in August. The report showed underlying inflation pressures were also muted, which could bolster the Fed's resolve to keep a loose monetary policy in place.

Prior to this week's policy meeting, several Fed officials said they were uncomfortable with the central bank's rate guidance, given that it was pegged to a calendar reference and not the economy's progress.

Another statement that has come under the microscope is the Fed's description of slack in the labour market. In July, it said a range of indicators suggested that there remained a"significant underutilisation of labour resources."

Some officials had taken issue with that line given a sharp drop in the unemployment rate over the past year. The unemployment rate dipped back down to 6.1 per cent in August, though job growth slowed and wage gains remained sluggish.