The Fed keeps its pledge on near-zero interest rates

Janet Yellen, chair of the Federal Reserve Board (AP)

The US Federal Reserve last night maintained its pledge to keep interest rates near zero for a “considerable time” after its bond-buying stimulus programme ends.

However, the Fed also released quarterly interest rate projections that suggested a faster pace of eventual rate rises than previously anticipated.

Fed chair Janet Yellen declined to elaborate on how long the “considerable time” could be before rates rise.

“There is no mechanical interpretation,” said Ms Yellen, adding that the pace of future interest rate rises would depend on the performance of the economy.

In a policy statement, the Fed said it would cut its buying of Treasury and mortgage-related bonds by another $10bn (£6bn) a month to $15bn, and it is expected to end the programme after its October meeting.

Many traders had worried the Fed might drop the phrase “considerable time” from its statement. It has kept its benchmark interest rate near zero for almost six years and engaged in large-scale bond purchases to help the US economy recover from the financial crisis.

Despite its “considerable time” pledge, the Fed also released projections from its 17 policymakers that suggested a faster pace of eventual rate rises than those made in June.

For the end of 2015, the median of the projections was 1.375 per cent, compared with 1.125 per cent in June, while the end of 2016 projection moved up to 2.875 per cent from 2.50 per cent. For 2017, the median stood at 3.75 per cent.

“A highly accommodative stance of monetary policy remains appropriate,” said the Federal Open Market Committee (FOMC) in its statement.

“The Committee continues to anticipate that it will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase programme ends, especially if projected inflation continues to run below the committee’s 2 per cent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

The FOMC repeated its assertion that a significant amount of slack remains in the US labour market, another indication that it may not be in a hurry to raise its benchmark rate.

Many traders have been betting the US central bank could raise interest rates next June, but interest rate futures had been indicating that the first rate rise will not happen until July.

The Fed’s statement followed news earlier in the day that US consumer prices fell for the first time in nearly 18 months, further reducing any urgent need for an earlier interest rate rise.

The Labour Department said its consumer price index dropped 0.2 per cent last month as a fall in energy prices compensated for increases in food and accommodation costs.

“There is still enough slack in the economy to keep a tight lid on price increases, which should support the view of those within the Fed arguing in favour of patience before the first rate hike,” said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.