Fed promises ‘patient’ approach to rate hikes
Washington — The Federal Reserve is edging closer to raising interest rates from record lows given a strengthening U.S. job market and economy. But it says it will be “patient” in determining when to raise rates.
The Fed said Wednesday after a policy meeting that such an approach is consistent with its previous guidance that it expected to keep its benchmark rate near zero for a “considerable time.”
Stock investors immediately signaled their approval of the Fed’s guidance, which appears to suggest that rates will stay low for at least several more months. The Dow Jones industrial average, which had risen about 160 points before the Fed issued its statement, was up about 270 points soon afterward.
The central bank gave no specific guidance on when the first rate hike might occur. Most economists think the first rate increase will occur in June as long as the Fed’s inflation outlook doesn’t remain persistently below its target rate of 2 percent.
In an updated economic forecast Wednesday, the Fed lowered its inflation forecast for next year to between 1 percent and 1.6 percent.
The Fed’s action was approved on a 7-3 vote. The three dissents from the majority view reflected the sharp battles inside the Fed as it tries to transition from an extended period of ultra-low rates to a period in which it will start to raise rates. The Fed has not raised rates in more than eight years.
The dissents included Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, two of the Fed’s leading hawks, officials who say the Fed needs to emphasize the fight against inflation more than the battle to boost employment.
But Narayana Kocherlakota, president of the Fed’s Minneapolis regional bank, also dissented. He is a leading dove, an official who has pushed for more efforts to boost employment.
The Fed’s decision to move to a “patient” approach had been expected given the significant gains this year in the labor market. The economy added 321,000 jobs in November, keeping on track for the healthiest year for job growth since 1999, with the unemployment rate now down to 5.8 percent. That is close to the 5.2 percent to 5.5 percent unemployment rate that the central bank considers maximum employment.
The Fed is following the pattern it set in 2004 when it moved away from the phrase “considerable period” in January of that year and substituted “patient.”: It followed that in June with the first rate hike.
The Fed’s key short-term rate has been at a record low near zero since December 2008. When the Fed does begin raising rates, the expectation is that the rate increases will be a gradual process implemented with small quarter-point moves that will leave consumer and business interest rates at historically low levels for a considerable period.
At the previous meeting in October, the Fed brought to an end its third round of bond purchases. Those bond purchases have pushed the Fed’s holdings to close to $4.5 trillion, more than four times the level of the Fed’s balance when the financial crisis hit in the fall of 2008.
While it is not adding to those bond holdings, the Fed is maintaining the current record-high level which is continuing to exert downward pressure on long-term rates.
Supporters of the bond purchases defend them as a successful attempt by the Fed to use all tools at its disposal to battle the worst economic downturn the country has seen since the Great Depression of the 1930s.
But critics of the move contend that the Fed will find it difficult to sell off its holdings without jolting financial markets. They also worry that the sharp increase in the money supply that was a result of the bond purchases will at some point trigger unwanted inflation and potentially inflate dangerous asset bubbles.