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Home / News / World /  US Federal Reserve drops patient stance, opening door to June rate increase

Washington: The US Federal Reserve (Fed) opened the door to an interest-rate increase as soon as June, while also indicating it will go slow once it gets started.

The new signals were contained in a policy statement that ended an era by dropping an assurance that the Fed will be “patient" in raising rates, and in a fresh set of estimates that lowered the median for the federal funds rate the end of 2015 to 0.625% compared with 1.125% in December.

“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient," chair Janet Yellen said in a press conference on Wednesday in Washington.

The Federal Open Market Committee (FOMC) said it will be appropriate to tighten “when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2% objective over the medium term."

“An increase in the target range for the federal funds rate remains unlikely at the April" meeting, it said in its statement.

Yellen is preparing for an exit from the most aggressive easing in the Fed’s 100-year history as the job market overcomes the damage wrought by the deepest recession since the 1930s. At the same time, inflation and wage growth that remain too low are giving her reasons for caution.

Stocks rose, erasing earlier losses, after the FOMC announcement. The Standard & Poor’s 500 Index was up 1.3% at 2,101.22 as of 3:08pm in New York. Ten-year Treasury notes yielded 1.92%, down 13 basis points.

Guidance change

While Fed officials lowered their estimate for the federal funds rate at the end of 2015, they said in their statement that “this change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range."

Dropping the pledge to be “patient" marks a shift away from the explicit guidance on the future path of policy that the Fed has used since late 2008 to keep longer-term borrowing costs low. The Fed will now set policy at each meeting based on the latest economic data, making its actions less predictable.

The Fed repeated that it sees “strong job gains" and that labour-market conditions have “improved further."

Still, the committee lowered its assessment of the economy, saying growth has “moderated somewhat." In January, it said the economy was “expanding at a solid pace." Export growth has weakened and the housing recovery remains slow, according to this month’s statement.

Two meetings

Yellen has said the promise to be “patient" means the FOMC would probably wait at least two meetings before raising rates. The next FOMC meetings are scheduled for April and June.

The Fed is preparing to tighten even as stagnant growth elsewhere prompts central banks in Europe, China and Japan to ease policy. That has put upward pressure on the dollar, which has jumped more than 4% since Fed policy makers last met on 28 January, posing a potential headwind to growth as American exports become more expensive.

Fed officials confront conflicting signals from their dual mandates for full employment and price stability as they weigh when to tighten policy for the first time since June 2006.

Surging job gains pushed unemployment down to 5.5% in February, the lowest level in almost seven years, suggesting the economy is strong enough to withstand higher borrowing costs.

Payroll gains have averaged more than 200,000 workers for 12 straight months, the longest streak of such increases since March 1995.

Above trend

“We are seeing an economy that’s growing above trend," Yellen said during her press conference. “The labour market is improving" and “some of the headwinds that have held the economy back are receding."

The economy grew at a 2.2% annualized rate in the three months ended December after a 5% jump in the third quarter that was the biggest in 11 years.

Among companies boosting payrolls is Omaha, Nebraska-based Union Pacific Corp. The largest publicly traded railroad in North America plans to hire about 5,700 employees this year amid an improving economy, Chief financial officer Rob Knight said this month in an investor conference.

“That’s a big number," Knight said. “A lot of those are high-paying union jobs, so these are very good jobs in our industry."

Housing, production

Even so, recent data on housing, industrial production and consumer spending have been weaker than forecast, prompting some economists to mark down their estimates for growth this quarter.

Inflation and wage growth also haven’t been as strong as many Fed officials would like, suggesting that there’s more slack left in the economy than low unemployment alone suggest.

“If we did see wage growth pick up, that would be at least a symptom that inflation would move up over time," Yellen said. Still, she said faster wage growth isn’t a precondition for raising interest rates.

Prices as measured by the Fed’s preferred gauge rose just 0.2% in January from a year earlier, and inflation has languished below the central bank’s 2% goal for 33 straight months.

Low inflation expectations are depressing 10-year Treasury yields, which hit a 20-month low of 1.64% in January. The yield was at 2.05% late Tuesday.

Wages present more of a puzzle. Average hourly earnings rose 2% in February from a year earlier, matching the average since the end of the recession in June 2009.

Eighty nine-percent of 49 economists surveyed by Bloomberg this month forecast that the Fed would drop “patient" from its statement. 69% predicted the phrase would be replaced by some other form of guidance.

In December, the FOMC dropped a clause from its statement that it would hold rates low for a “considerable time" and instead said it would be “patient" in weighing an increase. Bloomberg

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