The Federal Reserve says it will be “patient” about raising interest rates while still waiting a “considerable time” before making a move.
The central bank massaged that wording in the forward-looking part of the statement released this afternoon at the end of a two-day monetary policy meeting. The Fed’s forward guidance is designed to communicate a sense of when it will raise its benchmark interest rate, the federal funds rate.
Though the Fed kept the phrase “considerable time,” the policymaking committee added to it by mentioning patience.
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the statement said today.
The Fed’s favorite phrase for months
Since March 2014, the central bank has promised that interest rates will stay very low “for a considerable time after the asset purchase program ends,” referring to the bond-buying that the Fed had been using to stimulate the economy. The asset purchases ended in October. The federal funds rate has been ultralow, targeting between zero and 25 basis points, since December 2008.
At her news conference following the meeting, Fed Chair Janet Yellen said the central bank updated its wording because it didn’t seem “helpful” to keep referring to the bond-buying program. “Today’s statement … does not signify any change in the committee’s policy intentions,” she noted.
“The emphasis will be on gradual increase,” says David Nice, economist at Mesirow Financial in Chicago.
More from Yellen
Covering Chair Yellen’s news conference, Bankrate Washington Bureau Chief Mark Hamrick offered these tweets on her comments:
Chair Yellen says progress continues toward the Fed’s objective of “maximum employment.” Labor force participation rate has “leveled out.”
— Mark Hamrick (@hamrickisms) December 17, 2014
Yellen notes “almost all participants” see first rate boost in 2015, but a range of views of timing within the year. — Mark Hamrick (@hamrickisms) December 17, 2014
Yellen says “there’s room for further employment” in the job market, noting part-timers who’d like full-time work. — Mark Hamrick (@hamrickisms) December 17, 2014
Yellen says being “patient” means it is likely that rates won’t rise for at least a couple of FOMC meetings. But “no meeting” off the table. — Mark Hamrick (@hamrickisms) December 17, 2014
That means the first rate boost could come late spring, early summer. Yellen says “there is no pre-set time.” — Mark Hamrick (@hamrickisms) December 17, 2014
Yellen says “headline” inflation should be under pressure “for a while” because of downdraft connected to oil prices.
— Mark Hamrick (@hamrickisms) December 17, 2014
First mention of “global developments.” “We certainly discussed them at the meeting.” Russia not mentioned specifically (yet).
— Mark Hamrick (@hamrickisms) December 17, 2014
On “deflation” declining oil prices may “spill over to some extent to headline inflation.” Yellen says it is likely temporary.
— Mark Hamrick (@hamrickisms) December 17, 2014
An eye on weak inflation
To underscore the apparent need for loose monetary policy, today’s statement played up inflation’s sluggishness. Emphasizing the fact that inflation has been below target “lets them have more flexibility in raising interest rates,” says Nice.
This month’s policy statement again stressed that there has been some divergence between the various measures of inflation but stressed that long-term expectations remain steady.
“Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable,” the statement said.
Meanwhile, the labor market — another focus for the Fed — has been going gangbusters in terms of the total number of jobs being pumped into the economy.
Nearly a year of job strength
Employers added 321,000 jobs in November. The unemployment rate was unchanged at 5.8 percent.
“Nonfarm payrolls have expanded for 50 consecutive weeks,” says Charles Bilello, director of research at Pension Partners in New York.
Wages have failed to keep pace with the growth in payrolls, however.
“Wages have been stuck at 2 percent for a long time. Even though the job gains have been stronger, we haven’t seen an acceleration in wages. Recently we’ve been adding better-paying jobs, and if that trend continues, we do expect that wages will accelerate,” Nice says.
Wage growth could translate to faster economic growth and support the Fed’s movement toward an interest rate hike.
Market perceptions vs. Fed intentions
Though the Federal Reserve has a dual mandate to focus on inflation and employment, the stock market may be a central figure in the Fed’s planning.
One of the aims of the central bank’s bond-buying, also known as “quantitative easing,” was to inflate asset prices and create a wealth effect throughout the economy. “They want to create a virtuous cycle, with higher stock prices to improve the economy,” says Bilello.
But a falling stock market would negate all the effects of the asset purchasing. So, since the financial crisis, the central bank has responded to volatility in the stock market with promises of loose monetary policy, Bilello says.
Will central bank policymakers continue to support stocks, or will they stick to their mandate and mainly focus on inflation and employment? The answer to that question may help determine whether the Fed raises rates sooner — or later.
