WASHINGTON (REUTERS) - The Federal Reserve will probably end its massive bond-buying program this coming fall, and could start to raise interest rates around six months later, Fed Chair Janet Yellen said on Wednesday.
That's a somewhat more aggressive path toward higher rates than some investors had anticipated, and both US stocks and bonds slumped. Futures traders now are pricing in a first rate hike as soon as April 2015.
"She certainly moved (the timetable) up a little bit and I don't think the market was expecting that at all because she is widely viewed as being more on the dovish side of the aisle than she is on the hawkish side," said Peter Kenny, CEO of Clearpool Group in New York.
In announcing its view on future rates after a two-day policy meeting, the Fed dropped a set of guideposts it was using to help the public anticipate when it would finally start bumping overnight borrowing costs up from zero.
Ms Yellen used her first press conference as Fed chair to emphasize that rates will stay low for a while, rise only gradually, and could end up staying lower than normal "for some time" even after the economy regains its health given lasting scars from the financial crisis.
Ms Yellen was at pains to say that dropping the 6.5 per cent unemployment rate as a guideline in deciding when to raise rates did not represent a change in the Fed's policy intentions. The Fed said it would instead consider a wide range of economic indicators when deciding the future path of overnight rates.
She also said policymakers would be looking not only at how close inflation and unemployment are to the Fed's goals, but how fast, or slowly, those measures are approaching those goals.
The central bank noted in its statement that its embrace of easy money policies could continue even after the Fed achieves its goals of full employment and 2 per cent inflation.
In a news conference Ms Yellen said Fed officials cited "the residual impacts of the financial crisis" for this, with some noting "the potential growth rate of the economy may be lower at least for a time." Even so, the majority of Fed policymakers expect overnight interest rates to rise in 2015, according to forecasts released by the Fed on Wednesday.
The central bank proceeded with its well-telegraphed reductions to its massive bond-buying stimulus, announcing it would cut its monthly purchases of US Treasuries and mortgage-backed securities to US$55 billion (S$69.6 billion) from US$65 billion.
Minneapolis Fed President Narayana Kocherlakota dissented, saying that dropping the unemployment threshold could hurt the credibility of the Fed's commitment to return inflation to 2 per cent.