Fed confident on US growth, opens door wider to rate hike

REPUBLIKA.CO.ID, WASHINGTON — The Federal Reserve on Wednesday offered a strong signal that it was on track to raise interest rates sometime next year, altering a pledge to keep them near zero for a “considerable time” in a show of confidence in the US economy.

Closing out a two-day meeting against a backdrop of solid domestic growth but trouble overseas, the US central bank said in a statement it would take a “patient” approach in deciding when to bump borrowing costs higher.

Fed Chair Janet Yellen told a news conference that “patient” meant the policy-setting Federal Open Market Committee was unlikely to hike rates for “at least a couple of meetings,” meaning April of next year at the earliest.

US stock markets and bond yields rose as investors digested a statement that evinced faith in the economy while still projecting a slow-going approach to rate hikes. The dollar rallied broadly against major currencies.

After some initial volatility, futures markets continued to point to an increase in rates in September, and many economists look for a move even sooner. The Fed has held benchmark overnight rates near zero since December 2008.

“Based on its current assessment, the committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Fed said. Significantly, it also said the statement was “consistent” with its statement that it would wait a “considerable time” before hiking rates.

Eric Green, an analyst with TD Securities in New York, said Yellen’s definition of “patient” was “less dovish than a reading of the statement would suggest. In effect, it is open season after the March FOMC meeting.”

Yellen told reporters that even with a sharp drop in energy costs, the Fed felt confident inflation would eventually turn higher and approach the central bank’s 2 percent target, and she suggested officials would feel comfortable raising rates as long as other economic signals stayed strong and expectations of future inflation held firm.

“By the time of liftoff, participants expect to see some further decline in the unemployment rate and additional improvement in labor market conditions,” Yellen said.

Despite the sharp drop in oil prices and the collapse of the Russian rouble, the Fed’s statement excluded any mention of the recent global economic turmoil.

Asked whether spillover from Russia’s crisis could harm the U.S. economy, Yellen said the two countries were too loosely linked to expect any appreciable impact.

“I see the spillover as pretty small but we’re obviously watching that closely,” she said.

The vote to back the statement was seven to three, with dissents from both ends of the policy spectrum.

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