Federal Reserve policy makers surprised most everyone Wednesday by essentially doubling-down on their dovish policy of keeping interest rates at near-zero for the foreseeable future.
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Instead of eliminating a key phrase in its policy statement – “for a considerable time” – a move that had been widely expected, the Fed kept the phrase and added another one, saying the central bank “can be patient” toward a rate liftoff.
Both phrases are intentionally vague, and both are meant to reassure markets that the Fed is in no hurry to raise rates.
While no one expected the Fed to raise rates today or to establish any kind of specific timetable for a liftoff, there were high expectations the Fed would somehow send a signal – without establishing thresholds or a timeframe – that would better prepare market for an eventual hike.
That wasn’t the case. The statement remained as dovish and vague as ever.
The Fed added the phrase “for a considerable time” to its statement earlier this year to assure markets that interest rates would stay low well beyond the end of the Fed’s bond-purchasing program known as quantitative easing. The bond-buying program ended in October and markets have been anxiously awaiting word as to when the Fed will raise rates and how central bank policy makers will communicate that move. Today's statement was supposed to provide that word.
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Meanwhile, Fed Chair Janet Yellen in remarks during a press conference that followed the 2 p.m. release of the statement gave no indication that the Fed will diverge from the consensus opinion that rates will start to move higher in mid-2015.
Indeed, she said rates wouldn’t move higher at least “for a couple of Fed meetings.”
At the same time, she gave no indication that the Fed won’t keep rates low well beyond mid-2015.
Here’s the key part of Yellen’s prepared statement at the press conference: “This new language does not represent a change in our policy intentions, and is fully consistent with our previous guidance, which stated that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the end of our asset purchase program. But with that program having ended in October, and the economy continuing to make progress toward our objectives, the committee judged that some modification to our guidance is appropriate at this time.”
So, in an apparent effort to clarify, the Fed and Yellen sent something of a mixed-message, saying in effect that despite the fact that the economy is improving, especially in the area of labor markets, the Fed will continue to remain “patient” in terms of the timing of a rate hike.
‘Patient’ is apparently another way for the Fed to say that it will continue to maintain its cautious approach toward removing all of the stimulus that has buoyed the economy since the 2008 financial crisis.
Anyone who had expected the Fed to strongly hint toward a rate liftoff – as many had -- was way off the mark. In short, in spite of the shift in language, the Fed hasn’t altered its plans much, if at all.
Instead, the statement, as well as Yellen in her press conference, adhered to the Fed’s long-held mantra that interest rates will only move higher when the data confirms that such a move can be absorbed by the economy.
Yellen said labor markets are moving in that direction fairly quickly, with the unemployment rate falling, wages gradually rising and the labor force participation rate leveling. Some slack remains, however, with many Americans who want to work fulltime unable to find fulltime jobs, she said.
Inflation is another matter, however. Already running below the Fed’s target rate of 2%, plunging oil prices have pushed the price of gasoline lower, which has put even more downward pressure on inflation.
In this instance, Yellen conformed to predictions, suggesting that low oil prices were likely a temporary event and that they weren’t impacting long-term Fed policy. Echoing months of similar comments, the Fed chair said the strengthening labor markets would likely help push inflation back toward the Fed’s target rate during 2015.