The U.S. Federal Reserve says it can no longer remain patient about changing rates, an indication that interest rate hikes could begin this spring. But in a news conference, Fed chair Janet Yellen said the central bank has not settled on the timing of the rate hike.
Analysts were encouraged by the numbers released with the Fed’s statement, which indicate the funds target rate would be raised only half a point by year-end. That’s lower than it previously anticipated.
Since last December, Yellen and the Fed have been saying that they can be patient in the timing of when rates are raised.
In the Wednesday announcement, the Fed open market committee dropped the word patient on the timing of raising its benchmark interest rate. It specified it would not raise rates as soon as April, though the Fed specified it has no specific time in mind.
This change does not mean that an increase will necessarily occur in June, though the committee can't rule that out, Yellen said in her news conference. June would likely be the earliest date.
Everything will depend on the U.S. central bank's assessment of the U.S. economy over the next few months, the Fed said in a statement issued during early afternoon.
In determining how long to maintain this target range, the committee will assess progress — both realized and expected — toward its objectives of maximum employment and two per cent inflation, it said in the statement, noting that inflation remains too low.
This change in the forward guidance does not indicate that the committee has decided on the timing of the initial increase in the target range.
Unemployment in the U.S. is approaching its target range of 5.5% and its GDP grew 2.2% in the fourth quarter, according to latest estimates. But the bank is also concerned about indicators such as wage growth, labor participation, inflation and consumer spending, which have not yet improved as much as the Fed might like. It has downgraded some of its projections for growth for the rest of the year.
In its current assessment of the economy, the Fed said U.S. GDP would grow by 2.3 to 2.7% in 2015 and the same in 2016. It projected unemployment would decline to 5.0 to 5.2% this year, meaning it would fall below the Fed’s previous target rate without increasing inflation.
The central bank pointed to current low inflation, in the 1.3-1.4% range this year as oil prices and a high dollar keep costs low in the U.S. It projected inflation would rise in the medium-term to closer to its target rate of 2%.
Yellen said the numbers for the first quarter of 2015 show that growth has declined somewhat, due to international conditions and a high dollar.
A very strong dollar is one of the reasons for that; on the other hand, a strong dollar reflects the strength of the U.S. economy, she said.