The new Federal Reserve chairman, Janet Yellen, sent Wall Street sliding last night in her first public outing since taking on the role as she said interest rates could start to rise about six months after quantitative easing comes to an end.
Her comments undid much of the Federal Open Markets Committee's earlier dovish statement that said it would consider a far broader range of economic indicators than just unemployment before hiking borrowing costs. Namely, the committee will consider inflation expectations among other factors.
Asked when the rate-setting committee would start raising rates after QE, Ms Yellen said: "So the language that we use in the statement is 'considerable period'. This is the kind of term it's hard to define but probably means something on the order of around six months, or that type of thing."
On those words, the Dow Jones Industrial Average fell sharply, ending the session down 114 points at 16,222.
Analysts said that suggested, at the current pace of tapering out QE, rates would start to rise in about April 2015.
However, her overall comments were far from those of an out-and-out hawk.
She added: "What the statement is saying is it depends what conditions are like … The new guidance does not indicate any change in the policy intentions of the FOMC, but instead reflects changes in the conditions we face … progress in the labour market has been more rapid than we anticipated … Inflation matters here too. If we have a substantial shortfall in inflation, if inflation is persistently running below our 2 per cent objective, that is a very good reason to hold the funds rate at its present range for longer."
The rapid improvement in the jobless rate in the US has wrongfooted the Fed just as Britain's has caught out the Bank of England and its Governor, Mark Carney, who had to rewrite his own guidance which had been based around a 7 per cent unemployment threshold. Mr Carney set that target last August when unemployment was at 7.8 per cent. It has since plummeted to 7.2 per cent, where figures yesterday showed it had held for a second consecutive month.
Speaking after the Yellen conference, Brian Jacobson, chief portfolio strategist at Wells Fargo Funds Management, said: "The forward guidance is mildly hawkish. Yellen is no dove. She's a pragmatist."
Once rates do eventually start to rise, Fed officials see slightly sharper increases than they did in December, with rates ending 2015 at 1 per cent and ending 2016 at 2.25 per cent, according to forecasts by Fed policymakers. In December, Fed officials expected short-term rates to be just 1.75 per cent by the end of 2016.
Of the Fed's 16 policymakers, only one believes it will be appropriate to raise rates this year, according to Reuters, while 13 expect a first rate hike in 2015, and two others see the first rate rise happening in 2016.
On Wednesday, the Fed said the US economic recovery was strong enough for the central bank to continue reducing its bond-buying stimulus measures by $10bn (£6bn) a month.
These monthly purchases of mortgage-backed and Treasury securities have boosted markets and helped to keep interest rates low.
Beginning in April, the Fed will add to its holdings of agency mortgage-backed securities at a pace of $25bn a month rather than $30bn a month, and will add to its holdings of longer-term Treasury securities at a pace of $30bn a month rather than $35bn a month.Reuse content