Fed signals plan to keep key rate at record low
Washington — The Federal Reserve signaled Wednesday that it plans to keep a key interest rate at a record low for a considerable period because a broad range of U.S. economic measures remain subpar.
The Fed said it intends to keep its benchmark rate near zero as long as inflation remains under control, until it sees consistent gains in wage growth, long-term unemployment and other gauges of the job market.
The central bank retained language signaling its plans to keep short-term rates low “for a considerable time” after it ends its monthly bond purchases after its next meeting in October.
“In the Fed’s mind, the economy still has work to do, but it’s improving,” said Mike Arone, an investment strategist with State Street Global Advisors.
Stock prices rose after the Fed issued its statement at 2 p.m. Traders appeared pleased that the Fed seems in no hurry to raise rates. The yield on the 10-year Treasury note ticked up to 2.59 percent from 2.56 percent before the Fed’s statement.
In a statement after it ended its latest policy meeting, the Fed says it will make another $10 billion cut in the pace of its purchases, which have been intended to keep long-term borrowing rates low.
The Fed also issued updated forecasts for growth, inflation and interest rates. The median short-term rate supported by Fed policymakers at the end of 2015 is now 1.38 percent, up from 1.13 percent at its June meeting.
The Fed expects slower growth this year and next than in its last set of projections issued in June. It predicts that the economy will grow just 2 percent to 2.2 percent this year, down from their June forecast of 2.1 percent to 2.3 percent. That reduction likely reflects the sharp contraction in the first quarter of this year: 2.1 percent at an annual rate. The economy has rebounded solidly since then.
On the eve of the Fed’s meeting this week, the financial world had been on high alert for whether the Fed would drop or retain the words “considerable time.” Since March, the Fed’s statements have said it expects to keep its key short-term rate near zero for a “considerable time” after the bond buying ends.
Most economists have said they think the Fed will raise rates starting around mid-2015. But as the U.S. economy has strengthened, speculation has intensified about whether it might do so sooner, perhaps by March.
Chair Janet Yellen will be pressed to clarify the Fed’s intentions when she holds a news conference later Wednesday.
With job growth solid, manufacturing and construction growing and unemployment at a near-normal 6.1 percent, many analysts had suggested that the Fed was edging closer to a rate increase to prevent a rising economy from igniting inflation.
Other economic gauges have strengthened, too. The number of U.S. job openings is near its highest level in 13 years. Layoffs have dwindled. And consumer confidence has reached its highest point in nearly seven years.
Despite the steady decline in unemployment, Yellen has cautioned that it may overstate the job market’s improvement. She has said the Fed also takes into account the number of people unemployed for more than six months; the number of part-timers who want full-time work; and average wages. Those measures remain less than healthy.
Over the past several years, the Fed’s ultra-low rates have helped the economy, cheered the stock market and shrunk mortgage rates. A rate increase could threaten to reverse those trends.
In August, U.S. employers added just 142,000 jobs, well below the 212,000 average of the previous 12 months. The slowdown was seen as likely temporary. But some analysts said it underscored that the economic outlook might remain too hazy for the Fed to signal an earlier-than-expected rate hike.
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