US expected to raise interest rates in 2015

[schwartzie]

US expected to raise interest rates in 2015
US Federal Reserve chairman Janet Yellen said the central bank would stop using unemployment as a target to determine rate increases

By Katherine Rushton, US Business Editor

8:53PM GMT 19 Mar 2014



America is not expected to raise interest rates until next year, after US Federal Reserve chairman Janet Yellen said the central bank would stop using unemployment as a target to determine rate increases and set out a potential timetable for the change.

The Fed has spent the past two years telling markets it will increase interest rates only once unemployment falls below 6.5pc, but on Wednesday it abandoned that target and offered a much more nuanced form of “forward guidance”.

In its first press conference with Ms Yellen as chairman, the Federal Open Market Committee instead promised to “assess progress…towards its objectives of maximum employment and 2pc inflation”.

It also pledged to continue to slow its bond-buying programme, saying it would cut it by $10bn to $55bn a month from April.

However, the biggest news came as the Fed said it is likely to keep interest rates unchanged for a “considerable time” after it winds up its bond-buying scheme altogether. Mrs Yellen later clarified this period as around “six months”.

“It likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase programme ends, especially if projected inflation continues to run below the committee’s 2pc longer-run goal, and provided that longer-term inflation expectations remain well anchored,” the committee said.

The Fed is expected to end its bond-buying scheme in the autumn, as long as the economy improves, suggesting that an interest rate rise would come in spring 2015 at the earliest.

The central bank stressed that the shift in its language did not necessarily translate to a policy change, and restated its usual caveats that tapering is “not on a pre-set course”. However, investors still interpreted the statements as confirmation the Fed is paving the way for an a rate increase, with most analysts pointing to a rise in 2015.

The Dow Jones index fell on the announcements, dropping more than 200 points to 16,126, but subsequently made up some of these losses and was at 16,222 in late trading.

However, investors seemed more comfortable with the news than during previous Fed conferences chaired by Mrs Yellen’s predecessor, Ben Bernanke. Markets were wildly volatile during his last six months as chairman as investors pored over his remarks for signs the Fed was about to start tapering.

Mrs Yellen reassured investors the Fed would make its decisions based on a reasonable volume of data, rather than in a reactionary manner.

She admitted the central bank “probably overdid the optimism” in its assessment of the economy in January, but that its views for the quarter from December to March were pretty much “unchanged”.

The Fed is keen for traders to fall into line with its forecasts because if markets begin to price in earlier rate rises, this could cause tighter financial conditions that may deter the investment and hiring that the Fed wants to promote.

Many Fed officials, including Mrs Yellen, have attributed recent weak economic data to the harsh winter and believe warmer weather will improve economic performance.


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