MercoPress. South Atlantic News Agency

US Fed hints interest rates could start to rise in early 2015 as jobs picture improves

It was Janet Yellen first FOMC statement since taking over as Fed chairperson

The US Federal Reserve Chair Janet Yellen hinted on Wednesday that interest rates in the US could start to rise in early 2015, that is six months after it halts its monthly bond-buying program. Ms Yellen made the remarks after the Fed said it will scale back bond purchases by a further 10bn dollars per month.

 This is the third time in a row that the central bank has tightened its stimulus efforts. The latest reduction brings the Fed's monthly bond-buying down to 55bn from 85bn last year.

“This is the kind of term it's hard to define,” Ms Yellen said at a press conference. “Probably means something on the order of six months, or that type of thing.”

If bond purchases end - as expected - later this year, this would imply rate increases around April 2015.

Earlier in the day the Federal Open Market Committee voted 8-1 to cut its monthly bond purchases and in its release removed a reference in previous statements to keeping the central bank's benchmark interest rate near zero as long as the unemployment rate was above 6.5%.

Nevertheless the FOMC downgraded growth projections estimating the US economy would expand at a rate of 2.8% to 3% this year, down from the December projection of 2.8% to 3.2%.

But Fed policymakers improved their outlook on the unemployment rate, forecasting it would drop as low as 6.1% by the end of the year compared to a December projected low of 6.3%. With the unemployment rate falling faster than anticipated, Fed officials revised their so-called forward guidance on interest rates.

Fed policymakers said in their statement that they took the step because the unemployment rate was nearing that point -- it was 6.7% in February. But the statement said the revision “does not indicate any change in the committee's policy intentions.”

The policy statement was the first for the Federal Open Market Committee since Janet L. Yellen took over as central bank chairwoman on Feb. 3. The statement said data since the committee last met in January “indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions.”

“Labor market indicators were mixed but on balance showed further improvement,” the Fed said. “The unemployment rate, however, remains elevated.”

Fed officials said in December they would taper the central bank's 85 billion in monthly bond purchases by 10 billion and continue reducing the program “in measured steps” at future meetings if the outlook for the labor market continued to improve and inflation remained in check.

The Fed reduced the purchases by 10 billion again in January, and the policy committee did not meet in February.

In December 2012, with the unemployment rate at 7.8%, central bank policymakers said it would stay there at least as long as the rate remained above 6.5%. Last December, Fed officials amplified that by saying they probably would keep the interest rate near zero “well past the time” that the unemployment rate drops below 6.5%.

But the unemployment rate fell through most of last year and was at 6.7% in February.

Finally is must be said that voting against the action was Narayana Kocherlakota, who supported the sixth paragraph (of the FOMC statement), but “believed the fifth paragraph weakens the credibility of the Committee's commitment to return inflation to the 2% target from below and fosters policy uncertainty that hinders economic activity”.