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 Many economists and traders had expected the U.S. central bank to
alter the rate guidance it has provided since March, given generally
improving data on the economy's performance.
But the Fed repeated its assurance that rates would stay ultra-low
for a "considerable time" after a bond-buying stimulus program ends.
In a statement after a two-day meeting of its policy-setting Federal
Open Market Committee, it announced a further $10 billion reduction
in its monthly purchases, leaving the program on course to be
shuttered next month.
The statement was virtually unchanged from July, though new
quarterly projections released with it showed the central bank's
view on where interest rates should be in future years is diverging
from where financial markets have bet they will be.
"While the much analyzed phrase 'considerable time' remained in the
FOMC statement, the newly announced scheme for interest rate
normalization shows that higher rates are in the cards," said John
Kilduff, a partner at Again Capital LLC in New York.
Dallas Federal Reserve Bank President Richard Fisher and
Philadelphia Fed chief Charles Plosser dissented, arguing the
guidance on rates could tie the central bank's hands if it felt it
had to move more quickly to tighten monetary policy.
The Fed has held benchmark overnight rates near zero since December
2008 and has more than quadrupled its balance sheet to $4.4 trillion
through a series of large-scale bond purchase programs.
In a further sign the central bank is in no rush to start raising
rates, the FOMC repeated its assessment that a "significant" amount
of slack remains in the U.S. labor market.
Stocks were little changed after the statement, but the dollar hit
its highest level against the Japanese yen since September 2008.
Yields on U.S. Treasury bonds rose to session highs as traders moved
to price in the possibility of higher future rates.
The most significant change was the new rate projections, which
suggested officials were positioning themselves for a potentially
faster pace of rate hikes than they had envisioned when the last set
of forecasts were released in June.
For the end of next year, the median projection was 1.375 percent,
compared to 1.125 percent in June, while the end-2016 projection
moved up to 2.875 percent from 2.50 percent. For 2017, the median
stood at 3.75 percent - the level officials see as neither
stimulative nor restrictive.
By contrast, December 2015 federal funds futures imply an interbank
lending rate of 0.745 percent at the end of next year. Contracts for
December 2016 point to a rate of 1.85 percent.
Eric Lascelles, chief economist for RBC Global Asset Management in
Toronto, called the 2017 projections a "shocker."
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"I would have thought it would take a few more years to get all the
way up to what they perceive to be a neutral rate," he said.
Fed Chair Janet Yellen played down the shift in a news conference
after the statement was released.
"I would say there is relatively little upward movement in the
(federal funds rate) path," she told reporters. "I would view it as
broadly in line with what one would expect with a very small
downward reduction in the path for unemployment and a very slight
upward change in the projection for inflation."
EXIT STRATEGY
The Fed also released a new blueprint for how it plans to exit the
extraordinary monetary stimulus it put in place to combat the
2007-09 financial crisis and recession.
It said it expects to end or phase out the reinvestment of proceeds
from its bond holdings some time after it begins raising rates,
depending on the state of the economy.
In addition, it said it would move its target for the overnight
federal funds rate by adjusting the amount it pays banks for excess
reserves they hold at the central bank. Another tool, so-called
overnight reverse repurchase agreements, would play a supporting
role.
Prior to this week's policy meeting, several Fed officials said they
were uncomfortable with the central bank's rate guidance, given that
it was pegged to a calendar reference and not the economy's
progress.
Many economists said it would likely get stripped from the statement
after the Fed's next meeting in October.
(Reporting by Michael Flaherty and Howard Schneider in Washington;
Editing by Tim Ahmann and Paul Simao)
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