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 The U.S. central bank removed a reference to being "patient" on
rates from its policy statement, opening the door wider for a hike
in the next couple of months while sounding a cautious note on the
health of the economic recovery.
Fed officials also slashed their median estimate for the federal
funds rate - the key overnight lending rate - to 0.625 percent for
the end of 2015 from the 1.125 percent estimate in December.
The cut to the so-called "dot plot," together with other economic
concerns cited by the Fed, sent a more dovish message than investors
were expecting, and pushed market bets on the central bank's rate
"lift-off" from mid-year to the fall.
"Just because we removed the word 'patient' from the statement
doesn't mean we're going to be impatient," Fed Chair Janet Yellen
said in a press conference after Wednesday's statement.
Stocks on Wall Street surged and oil prices jumped as much as 5
percent after the Fed statement. The dollar tumbled against other
major currencies and the U.S. 10-year Treasury yield dipped below 2
percent for the first time since March 2.
In its quarterly summary of economic projections, the Fed cut its
inflation outlook for 2015 and reduced expected U.S. economic
growth. The policy statement repeated its concern that inflation
measures were running below expectations, weighed down in part by
falling energy prices.
"I just don't see any price or wage pressure out there," said Craig
Dismuke, chief economist for Vining Sparks. "June is not off the
table but it's unlikely. September is the most likely time for the
first rate hike. They might get one hike in this year, maybe two."
The Fed noted that a rate increase remained "unlikely" at its April
meeting and said its change in rate guidance did not mean it has
decided on the timing for a rate hike. Yellen told reporters that a
June move could not be ruled out.
The Fed statement, however, allowed enough flexibility for the
central bank to move later in the year, stressing that any decision
would depend on incoming data.
"The committee anticipates that it will be appropriate to raise the
target range for the federal funds rate when it has seen further
improvement in the labor market and is reasonably confident that
inflation will move back to its 2 percent objective over the
medium-term," the Fed said.
It had previously said it would be patient in considering when to
bring monetary policy back to normal.
Goldman Sachs economist Jan Hatzius said in a research note that the
Fed's statement and projections suggested a hike in September rather
than June, citing the "dot plot" shift and changes to the central
bank's assessment of the economy.
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MUDDY DATA
Yellen has kept rates at near zero since taking over as head of the
central bank in February, 2014, though she has also overseen a
steady whittling of loose money promises.
And while she lays the ground for "lift-off," the Fed continues to
grapple with muddy economic data: strong job creation, continued
growth, and healthy consumer demand in the United States, but a
global collapse in oil prices and a rapid run-up in the dollar that
could mean the Fed remains far from its 2 percent inflation target.
The Fed on Wednesday downgraded its view of economic activity,
saying growth has "moderated somewhat," a departure from its view in
December, when it cited economic activity expanding at a solid pace.
Economists and investors were watching closely for the Fed to drop
"patient" from its rate guidance language, as a sign that the
central bank will shift toward making rate decisions on a
meeting-by-meeting basis.
"Let me emphasize again, that today's modification of the forward
guidance should not be read as indicating that the committee has
decided on the timing of the initial increase in the target range
for the federal funds rate," Yellen said in the press conference.
"In particular, this change does not mean that an increase will
necessarily occur in June. Although we can't rule that out."
The federal funds rate has been at its low point since December of
2008. The last time the Fed raised rates was in June 2006, when a
roaring housing market and strong economic growth prompted it to
push its target rate to 5.25 percent.
There were no dissents on the Fed statement.
(Reporting by Michael Flaherty and Howard Schneider; Additional
reporting by Richard Leong in New York; Editing by David Chance and
Paul Simao)
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