Fed holds rates now; forecast rise after April

Federal Reserve removes word 'patient;' interest rate increase expected within months. Yellen says timing of rate rise 'not decided,' but will come anytime after April; holds current rates at 0 to 0.25 pct.

Fed holds rates now; forecast rise after April

World Bulletin / News Desk

Federal Reserve Board Chairwoman Janet Yellen said Wednesday that an interest rate rise could come anytime "after the month of April."

Speaking at a press conference in Washington after the Fed released its "beige book," a statement on the current economic context, Yellen said that the central bank would not raise interest rates now, nor at the next monetary policy decision meeting in April.

But a rate rise could come at any time after that, Yellen warned. However, it would not come necessarily in June, Yellen said.

Analysts at the international bank Goldman Sachs read this to mean that a rate hike was more likely in September than in June as had previously been expected.

The "beige book" statement, which summarizes the Fed's outlook on the economy after this week's two-day meeting, changed the language about interest rate policy that had appeared in previous statements — that the Fed can be "patient" in approaching interest rate hikes — with language that says current interest rate policy "remains appropriate."

But Yellen warned in her speech: "Just because we removed the word 'patient' doesn't mean we're going to be impatient."

Yellen pegged an interest rate hike decision to an improvement in the inflation outlook. She said the Fed was still not confident that stubbornly low inflation was on track to return to its two percent target.

In its statement, the Fed reduced its estimates of inflation, with the Fed now projecting inflation of 0.6 percent to 0.8 percent in 2015, rising to between 1.7 percent and 1.9 percent in 2016 and finally to near two percent in 2017.

The Fed also lowered forecast of economic growth in the coming years. In 2015, the Fed now predicts growth of 2.3 percent to 2.7 percent, down from its December forecast of 2.6 percent to 3.0 percent. Reduced growth is also predicted for 2016 and 2017.

But Yellen predicted that unemployment would drop to five percent or below this year, and, if it does, this would be an important signal for a rate hike.

The dollar fell 0.6 per cent against a basket of currencies, and the euro was up 1.4 per cent at $1.0743 after Yellen's speech. The Turkish lira rose slightly to about 2.58 to the dollar on the news.

Growth is "above trend," Yellen said. "We see considerable underlying strength in the U.S. economy, and we project further good performance despite a weaker third quarter."

But Yellen said that "inflation will remain quite low because of the depressing influence of energy prices and the dollar."

Also, there is no sufficient wage growth pickup, and the Fed will be watching it carefully, she explained.

"Further improvement in the labor market will be necessary before we move to raise rates," she said.

"By the end of 2015, the central tendency is we're looking for an unemployment rate that’s down to 5 to 5.2 percent which is consistent with their estimates of its longer run normal value,” she added.

A report Monday showed that output at U.S. factories fell for a third straight month in February, with automobile production falling off sharply. Retail sales have also remained sluggish despite a big drop in gas prices that has put more money in consumers’ pockets.

Stocks, which had been declining until the Fed's announcement in the U.S., changed direction and took off after Yellen's conference.

The effect of the Fed move on emerging markets is expected to be positive. The dovish prediction means that a rate hike is not imminent, and this will help to stabilize funds flow into emerging markets. International Monetary Fund director Christine Lagarde had warned Tuesday that a Fed rate hike could destabilize emerging markets.

Last Mod: 19 Mart 2015, 09:16
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