Fed Sets Stage for Rate Hikes in 2015

Fed Sets Stage for Rate Hikes in 2015

ratesThe Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis. In a statement Wednesday after a two-day policy meeting, the Fed broached the prospect of “beginning to normalize the stance of monetary policy,” the most direct reference to raising rates it has made in years.

Rates have been held near zero since December 2008 and since then the Fed has offered assurances that they would stay low amid low inflation and elevated levels of unemployment.

The new statement said the Fed would be “patient” before raising rates, adding that the overall outlook hadn’t much changed from earlier assurances that rates would stay low for a “considerable time.” In a news conference following the meeting, Ms. Yellen effectively said there are no promises. “The committee considers it unlikely to begin the normalization process for at least the next couple of meetings,” she said. “This assessment, of course, is completely data-dependent,” she added, meaning it will depend on the path of the economy.

The central bank’s next scheduled policy meeting is Jan. 27-28. The following is March 17-18. Several top Fed officials have said they expect they will start lifting rates around the middle of 2015 and the Fed’s interest-rate projections, released with Wednesday’s statement, suggested that remains the predominant view.

Staying on track could be a challenge, given divisions among policy makers. Fed officials’ choices won’t get easier in the months ahead. In forecasts released with the statement, officials said they expected rates to end up anywhere between 0.375% and 4% by the end of 2016. Within that range, 17 officials project 13 different points where interest rates might end up.

Fed officials are sticking to their view that the downward pressure on inflation will be sharp but short-lived. Officials projected 1.0% to 1.6% consumer price inflation in 2015, a large downward revision from earlier estimates. But they saw it returning to between 1.7% and 2.0% in 2016 and between 1.8% and 2.0% in 2017. The Fed has confidence that recent oil declines won’t seriously derail their efforts to get inflation back to the 2% goal. It has been running under that goal for nearly three years but many officials believe that as labor market slack diminishes, inflation will move back toward 2%.

Ms. Yellen said the Fed would start raising rates as long as it was “reasonably confident” that inflation would move back to the 2% goal. “The committee continues to monitor inflation developments closely,” the statement said.

 

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