Fed drops 'patient' from policy statement, signalling possible rate hike

WASHINGTON (AFP) - The Federal Reserve dropped its pledge to remain “patient” on raising interest rates Wednesday, signalling a possible mid-year fed funds rate hike after over six years at the zero level.

The dropping of the key word from its policy statement at the end of a two-day meeting was a significant step away from its crisis-based monetary policy since 2008.

But a still cautious Fed noted that in fact US economic growth had “moderated somewhat” since January and the central bank marked down its growth forecast for this year by 0.3 percentage point to 2.3-2.7 per cent.

The Federal Open Market Committee (FOMC), the Fed’s policy arm, said that although the jobs market appeared to continue to strengthen, inflation was still weak, the housing sector was sluggish and export growth had slowed.

Despite the change in the language, the policy body stressed that it would not rush into a rate hike immediately.

“The Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting,” it said.

“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term.”

Speaking just after the meeting, Fed chair Janet Yellen stressed that the committee had not decided firmly on a date for the rate hike, now widely expected in June.

“Just because we removed the word patient from the statement doesn’t mean we’re going to be impatient,” she said.

Updated projections by the Fed reflected the adjusted outlook for the economy: while it sees the unemployment rate falling to as low as 5 per cent by the end of this year, better than the December outlook, inflation is expected to be only 0.6-0.8 per cent, compared with 1.0-1.6 per cent previously projected.

Given that, the projection for the fed funds rate at the end of year was 0.5-0.75 per cent, compared with the December outlook of 1 per cent.

The end-2016 rate forecast was 0.5 percentage point lower at 1.75-2 per cent.

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

About 45 minutes after the release of the Fed policy statement at 1800 GMT (2am Singapore time), the Dow Jones Industrial Average was up 0.92 per cent, and the broad-based S&P 500 gained 1 per cent.

Wall Street had been in the red earlier, with the Dow down about 150 points about 20 minutes before the statement’s release.

The dollar meanwhile fell to US$1.78 per euro from US$1.064 prior to the policy announcement.