FT : Fed drops pledge to be ‘patient’ on rate rises

Fed drops pledge to be ‘patient’ on rate rises

The Federal Reserve has dropped its pledge to be “patient” before raising interest rates, freeing its hand to lift official borrowing costs for the first time in nearly a decade.

The US central bank left its target range for short-term rates at zero to a quarter per cent today, adding that it did not expect to pull the trigger on rate rises as soon as April, but opening up its options from June onward.

However, it also reduced its forecasts for growth and inflation and projections of interest rates, suggesting the Fed may wait longer than June — the first date available for a hike.

In a statement, the Federal Open Market Committee said it anticipated lifting rates when it had seen further improvement in the labour market and was “reasonably confident” that inflation would move back to its 2 per cent target over the medium term. This new language did not mean the committee has made up its mind when to raise rates, however, the statement added.

The biggest market reaction was seen in US equities, where the broad S&P 500 index erased losses to rise 1.1 per cent. Investors bought up US Treasuries, pushing yields on the benchmark 10-year note 6 basis points lower and back below 2 per cent.

The dollar weakened, with the euro jumping as much as 1 per cent against the US dollar to trade at $1.068.

The decision came in the most hotly anticipated Fed meeting since Janet Yellen took the chair of the central bank more than a year ago. The dollar has been trading at multiyear highs against a range of currencies, partly in anticipation of higher borrowing costs in the US following over six years of near-zero rates, but also as some two dozen other central banks have eased policy this year.

These gains have sparked concerns that the US economic growth outlook could be dented as exports sag, and that the Fed’s inflation expectations could be shaved back. The International Monetary Fund’s Christine Lagarde warned that rate rises could trigger instability in emerging markets, while one prominent hedge fund manager, Ray Dalio, warned of the risk of a 1937-style stock market slump when it finally raises rates

In a press conference after the statement, Ms Yellen said the change in language did not mean the Fed had become “impatient” about raising rates.

The statement did not mention the dollar explicitly, but Fed rate-setters reduced their growth and inflation outlook, as well as their expectations for the pace at which rates will be hiked in the coming years, perhaps reflecting that dollar influence. They also reduced their estimates for unemployment as job growth continues to defy analyst expectations.

The FOMC also noted that export growth had “weakened”, in an implicit acknowledgment of the dollar’s influence.

Dan Greenhaus, chief strategist at BTIG said: “The FOMC is looking for ‘further’ improvement, meaning the economy and labour market has not yet met whatever criteria necessary to warrant a rate hike. We remain of the belief the Fed will first raise rates in September and view this statement, and the projection changes, as reducing the odds of a June hike.”

Ms Yellen on February 24 paved the way for the “patience” pledge to be ditched, as she sought to give the Federal Open Market Committee a freer hand to change rates when it saw fit. The promise committed the FOMC to holding rates unchanged for at least two meetings. This would have ruled out hikes in June if it had been reiterated today.

In new projections, FOMC members reduced their growth outlooks for 2015, 2016 and 2017, with the central tendency for 2015 reduced to 2.3-2.7 per cent from 2.6-3 per cent.

Countering that was a reduction in the unemployment rate, which is now seen at 5-5.2 per cent this year, down from 5.2-5.3 per cent, and to 4.9-5.1 per cent in 2016 from 5-5.2 per cent.

The FOMC’s estimate that the longer-run normal rate of unemployment is now 5-5.2 per cent, lower than previously estimated, and suggesting there may be more slack in the labour market than previously believed. That could give the FOMC scope for a shallower path of monetary tightening.

Its outlook for core inflation was reduced to 1.3-1.4 per cent this year, from 1.5-1.8 per cent previously, and to 1.5-1.9 per cent for 2016 from 1.7-2 per cent previously. However the view for 2017 was left unchanged at 1.8-2 per cent, suggesting the FOMC still sees the low inflation readings as transitory.

Alongside growth forecasts that shaved back the FOMC’s outlook, Fed rate-setters set out their projections for the central bank’s key rate until 2017.

These showed median expectations for the end of 2015, 2016 and 2017 being cut. The outlook for 2015 was reduced to 0.625 per cent from 1.125 per cent in December, and to 1.875 per cent for 2016, lower than the 2.5 per cent prior median. The outlook for 2017 was for rates of 3.125 per cent. That remains well above measures of market expectations, which suggest the federal funds rate will only hit 2 per cent in 2017. The projection for the longer-run rate remained at 3.75 per cent.