WASHINGTON – The Federal Reserve cleared the way Wednesday for raising interest rates for the first time in six years, but said it was in no hurry to act as long as inflation was tame and economic growth moderate.
The Fed dropped the closely watched buzzword “patient” it has used to describe its approach to raising the federal funds rate, which is one of the central bank’s main tools for stimulating or slowing the U.S. economy and a key benchmark for other interest rates.
But the central bank’s next move has grown more complicated with a number of unexpected factors, including dangerously low inflation, an abrupt strengthening of the dollar, and turmoil in the struggling economies of Europe, Japan and emerging markets.
The Federal Reserve said it would definitely not act on rates in April and might wait until later in the year. “Just because we removed the word patient from the statement does not mean we are going to be impatient,” Federal Reserve Chairwoman Janet Yellen said in a news conference.
U.S. markets, which had been down early in the day, greeted that as good news, and stock and bond prices climbed sharply after the announcement.
Ever since the financial crisis hit, the Fed has tried to resuscitate the economy by keeping the federal funds rate between zero and a quarter of a percentage point, the longest period of such low rates for more than half a century.
Through that and its program of buying bonds and mortgage securities, the Fed has helped lower interest rates for millions of car buyers, homeowners and businesses. The cost of paying interest on household debt is now lower than any time at least since 1980. Much of that debt is locked in at long-term rates that may not fluctuate much when the Fed raises rates.
But now Yellen and other Fed officials have been saying they want to start moving rates back to “normal” levels, which they say estimate would be between 3.5 and 4 percent. How businesses and individuals will adjust is difficult to predict.
Finding the right time is tricky, too. Even though unemployment has dropped substantially, low oil prices and the strong dollar have made imports cheaper, and kept inflation below the Fed’s target range. The strong dollar has also made U.S. exports less competitive, hurting growth.
“The dollar is a real wild card,” said Laurence Meyer, a former Fed governor and an economist at Macroeconomic Advisers. It is “interfering with what the Fed thought its pace would be, which was already very slow.”
Meyer said the Fed is “desperate” to start raising rates, but he said it was now unlikely that there would be any moves before September.
The Fed committee said it would raise the target range for the federal funds rate when the central bank has seen “further improvement” in the labor market and is “reasonably confident” that inflation is nearing its 2 percent target. It added that the change in its language Wednesday does not mean that the Fed has decided on the timing of the initial increase.
The Fed has more modest expectations for the economy than it did just three months ago, an outlook that suggests a more cautious approach to boosting interest rates. It said growth “has moderated” while labor market conditions had “improved further.”
The Fed surveys its own board members and regional presidents and they lowered their forecast for economic growth to a high of 2.7 percent in 2015 and 2016, down from an upper end of 3 percent it forecast just three months earlier. Unemployment was a spot for optimism. The Fed said that unemployment this year would edge down to a range between 5.0 and 5.2 percent, slightly lower than its December projections and now a level its members said could be sustainable over the long run without fueling inflation.
Over the past six months, low oil prices have helped keep inflation and inflation expectations modest, spilling over into inflation for other goods. The central bank lowered its own forecast for 2015 core inflation — excluding oil — to a high of 1.4 percent from a forecast high of 1.8 percent last December.
But it has said that the steep drop in oil prices was temporary and some professional economists have blamed bad weather in the Northeast for causing gross domestic product to slip about one percentage point.
The open market committee also sought to reassure investors about interest rates beyond the next few meetings. It said that even after employment and inflation are at the central bank’s target levels, the Fed may keep the federal funds rate “below levels the committee views as normal in the longer run.”
While it made scant mention of international developments, most economists said that the strong dollar and aggressive steps by the European Central Bank and Bank of Japan were already having an effect similar to a rate increase by curtailing U.S. exports.
John Canally, chief economic strategist for LPL Financial, said that the Fed had provided “a spoonful of sugar” to help the change in phrasing go down easily in stock and bond markets. He pointed to lower interest rate expectations among the Fed board members.