The Federal Reserve gave its strongest hint yet yesterday that interest rates in the United States will rise sooner rather than later by dropping the word “patient” from its post-meeting statement.
The removal of that single word prompted many traders to expect a move on interest rates before the end of the year at least, although the Fed voted unanimously to maintain rates at the current level of zero to quarter per cent.
At a press conference following the statement, Chair Janet Yellen told reporters that any decision to raise rates in June would depend on the data as it is made available to the rate-setting Federal Open Market Committee. She said: “Just because we removed the word ‘patient’ does not mean that we are going to be impatient.”
Just last month, Ms Yellen said that the Fed would look at increasing the cost of borrowing on a meeting-by-meeting basis, but continued evidence of strong US economic performance may mean a rate rise as soon as June.
However, the Fed is looking for signs of continued strength in the US jobs market before raising rates, and yesterday noted that growth has “moderated”. The committee also trimmed its economic growth forecasts for the next three years.
Wall Street rallied on the back of the statement, with the Dow Jones up more than 150 points within minutes of its release.
The Fed said: “Labour market conditions have improved further, with strong job gains and a lower unemployment rate… The committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced… An increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.”
Ms Yellen noted that the US economy remains somewhat mixed, despite several good recent headline numbers.
Similarly to January’s post-meeting statement, the Fed highlighted the weak energy market, slower export growth, household spending and below-target inflation as areas of concern. Not only has inflation remained below the long-term 2 per cent target, Ms Yellen told reporters that energy costs – with the oil price slumping since last summer – have driven inflation even lower.
The Fed’s more hawkish approach to interest rates is a another sign that the US economy is finally returning to normality after the 2008 subprime mortgage crisis. Rates have been held at almost zero since then.
“The big takeaway is flexibility, as is the Fed’s willingness to watch data as it becomes available,” said William Waite, managing director of Semnia, the economics consultancy. “This takes the handcuffs off, giving them the additional ability to respond as the situation warrants.”
Others, however, were more cautious. “The Fed is in no rush,” said Ward McCarthy, chief US economist at Jefferies. “The word ‘patient’ was removed, but the meaning of patient remained.”
Markets were cautious ahead of Ms Yellen’s statement, in part due to comments made on Tuesday by Christine Lagarde, the head of the International Monetary Fund. At an appearance at India’s central bank, Ms Lagarde warned of another market “temper tantrum”, like the sell-off in 2013 that was sparked by the end of the Fed’s quantitative easing programme.Reuse content