US central bank paves way for its first post-crash interest rate hike as early as this June, as the economy gains momentum
By Peter Spence, Economics Correspondent
6:03PM GMT 18 Mar 2015
The Federal Reserve building in Washington Photo: David Coleman / Alamy
The Federal Reserve has paved the way for the first change to its interest rates since the financial crisis, as the economic outlook has improved.
The word "patience" was dropped in the latest policy statement issued by the Fed in reference to raising rates, implying that the central bank could now move towards its first crash rate hike. The Fed's target rate has remained static at zero to 0.25pc since 2008.
The linguistic change could allow the Fed to increase its rates as early as June. When the Fed removed "patient" from its guidance in May 2004, it waited only a month longer before raising its rates.
Markets expect the Fed to move more slowly this time around, and anticipate the first hike in September. Janet Yellen, the Fed's chair, said on Wednesday: "Just because we removed the word patient from the statement does not mean we are going to be impatient."
Members of the Fed's board reduced their expectations of rate hikes this year, expecting interest rates to reach just 0.625pc at the end of the year, compared with the 1.125pc predicted in December.
Signs that the central bank could keep rates at their near-zero levels for longer sent stocks and bonds higher, with the S&P 500 1.5pc higher on the day after the statement was released.
Analysts suggested the cautious approach to a rise in rates might reflect desires to avoid a sell-off in Treasuries, as the Fed attempts to avoid a repeat of the so-called "Taper Tantrum" of 2013.
Signs that the central bank was scaling back its monetary stimulus triggered "indiscriminate capital outflows" across emerging market economies, Christine Lagarde, head of the International Monetary Fund said on Monday.
Ms Lagarde warned that if the Fed raised its rates this year it could prompt a second round of market panic, remarking that "the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets."
On the question of a possible interest rate hike in June, Ms Yellen said: "We can't rule that out." She said that an increase could be warranted at any meeting after April depending on how the economic situation evolves.
There is "considerable underlying strength in the US economy", the Fed chair said, noting that severals headwinds to growth had receded while there had been marked improvements in the jobs market.
A tumble in the US unemployment rate to just 5.5pc in February put the jobless level on the edge of the Fed's own estimate of the so-called "natural rate" of unemployment.
Analysts argued that this put pressure on the central bank to raise its rates. The Fed has now revised its estimate of the natural rate from 5.2pc to 5.5pc down to 5pc to 5.2pc, suggesting that it can let unemployment fall further before pulling the trigger on a rate hike.
The strong jobs market performance came as the US fell back into deflation for the first time since 2009. The step into negative territory is expected to be temporary, as central bank watchers anticipate that the Fed will persevere in returning policy from its emergency settings.
The Fed's statement said that it would raise rates when it was "reasonably confident" that inflation would return back to its 2pc objective over the medium term.
The central bank acknowledged that "economic growth has moderated somewhat", and seemed less optimistic about the US growth outlook, anticipating growth of just 2.3pc to 2.7pc in 2015, lower than the 2.6pc to 3pc pencilled in last December. Forecasts for growth over the next two years were also reduced.
James Knightley, of ING, said: "The main argument for tighter policy stems from the labour market data with unemployment falling, employment rising and labour market slack shrinking."
"The bit that has been missing is higher pay, but with labour market turnover starting to pick up and with surveys suggesting staff retention is becoming more of an issue for companies, we believe that this is not far away," he added.
As the Fed has taken steps towards raising rates in the US, the central bank's international peers have injected greater amounts of stimulus in their respective economies.
Bond-buying in the eurozone and Japan has sent the dollar higher. This appreciation has in turn threatened to hold back US exporters. The Fed noted that "export growth looks to have weakened", while Ms Yellen said net exports would likely weigh on US growth this year.
Analysts suggested the cautious approach to a rise in rates might reflect desires to avoid a sell-off in Treasuries, as the Fed attempts to avoid a repeat of the so-called "Taper Tantrum" of 2013.
Signs that the central bank was scaling back its monetary stimulus triggered "indiscriminate capital outflows" across emerging market economies, Christine Lagarde, head of the International Monetary Fund said on Monday.
Ms Lagarde warned that if the Fed raised its rates this year it could prompt a second round of market panic, remarking that "the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets."
On the question of a possible interest rate hike in June, Ms Yellen said: "We can't rule that out." She said that an increase could be warranted at any meeting after April depending on how the economic situation evolves.
There is "considerable underlying strength in the US economy", the Fed chair said, noting that severals headwinds to growth had receded while there had been marked improvements in the jobs market.
A tumble in the US unemployment rate to just 5.5pc in February put the jobless level on the edge of the Fed's own estimate of the so-called "natural rate" of unemployment.
Analysts argued that this put pressure on the central bank to raise its rates. The Fed has now revised its estimate of the natural rate from 5.2pc to 5.5pc down to 5pc to 5.2pc, suggesting that it can let unemployment fall further before pulling the trigger on a rate hike.
The strong jobs market performance came as the US fell back into deflation for the first time since 2009. The step into negative territory is expected to be temporary, as central bank watchers anticipate that the Fed will persevere in returning policy from its emergency settings.
The Fed's statement said that it would raise rates when it was "reasonably confident" that inflation would return back to its 2pc objective over the medium term.
The central bank acknowledged that "economic growth has moderated somewhat", and seemed less optimistic about the US growth outlook, anticipating growth of just 2.3pc to 2.7pc in 2015, lower than the 2.6pc to 3pc pencilled in last December. Forecasts for growth over the next two years were also reduced.
James Knightley, of ING, said: "The main argument for tighter policy stems from the labour market data with unemployment falling, employment rising and labour market slack shrinking."
"The bit that has been missing is higher pay, but with labour market turnover starting to pick up and with surveys suggesting staff retention is becoming more of an issue for companies, we believe that this is not far away," he added.
As the Fed has taken steps towards raising rates in the US, the central bank's international peers have injected greater amounts of stimulus in their respective economies.
Bond-buying in the eurozone and Japan has sent the dollar higher. This appreciation has in turn threatened to hold back US exporters. The Fed noted that "export growth looks to have weakened", while Ms Yellen said net exports would likely weigh on US growth this year.
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