The Federal Reserve cautiously cleared the way Wednesday for a midyear increase of its benchmark interest rate, the first such hike in more than six years.
At the close of a two-day meeting, the rate-setting Federal Open Market Committee issued a statement removing prior guidance that had suggested it would be patient in raising its closely watched interest rate.
Financial analysts had expected the Fed to remove the language about patience as a sign that it was readying to raise rates for the first time since December 2008, when the economy was mired in the Great Recession and financial crisis.
In a news conference, Fed Chair Janet Yellen ruled out an April hike but cautioned it’s not a given, contrary to market expectations, that an interest rate increase is coming in June or that after the first rate hike there would necessarily be a series of such actions.
Removing the phrase about patience “does not mean we are going to be impatient,” she said, noting the Fed is likely to keep interest rates low for an extended period. That signaled the Fed expects to support economic growth for several years with low rates, even if there are a few increases.
“Sounds more like ‘hurry up and wait’ than ‘we are ready to go,’ ” said Stuart Hoffman, chief economist for the PNC Financial Services Group in Pittsburgh.
Markets liked what they heard. The Dow Jones industrial average rose 227.11 points to close at 18,076.19. The S&P 500 rose by 25.22 points to finish at 2,099.22 and the Nasdaq ended up 45.39 points to close at 4982.83.
What will lead the Fed to finally raise its benchmark rate?
The Fed said in its statement that it wanted to see “further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective for the medium term.”
Significantly, an accompanying Fed document Wednesday showed that more members of the rate-setting committee now expect interest rates to return to their historical levels more slowly than had been thought earlier.
“After the FOMC’s initial rate hike, the subsequent rate-hike pace is likely to be somewhat slower than previously forecast over the next two years,” said Scott Anderson. chief economist for Bank of the West in San Francisco.
Financial markets have been nervous in recent weeks, concerned that the increase in the Fed’s lending rate will raise borrowing and lending costs across the economy. The benchmark rate influences the cost of borrowing for everything from homes and cars to credit cards and business loans.
One reason the Fed expects to keep rates low for a protracted period is that the global economic outlook is growing muddier.
As Europe weakens and China slows, the United States looks healthier and the dollar is gaining strength against rival currencies. Yellen suggested this is a double-edged sword that’s contributed to a slight downgrade of the Fed’s forecast for U.S. growth.
“We noted that export growth has weakened. Probably the strengthening dollar is one reason for that,” she said. “On the other hand, the strength of the dollar partly reflects the strength of the U.S. economy.”
The strong dollar has held down the rise in import prices, thus dampening inflation and keeping it below where the Fed would like it to be.
“We are taking account of international developments, including prospects for growth,” said Yellen. “Nevertheless, it is important to recognize that this is not a weak forecast.”
The Fed still sees above-average growth, but Yellen said data suggested that the first three months of the year would be slower than the previous six months. She pointed to continued sluggishness in the housing sector and weak export growth, and said she expected “a moderate pace of (economic) growth with robust job gains and lower energy prices supporting household spending.”
Fed governors and bank presidents also issued their revised economic projections, showing that most now expect growth of 2.3 percent to 2.7 percent. That’s down from December’s projection of 2015 growth between 2.7 percent and 3 percent. They also slightly dialed back their growth expectations for the subsequent two years.
However, their projections now are that the jobless rate will end the year at 5 percent to 5.2 percent. That’s better than the 5.2 percent to 5.3 percent rate projected last December.
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