Federal Reserve remains patient over rates hike

Central bank says US economy is expanding at a ‘solid’ pace

The Federal Reserve has signalled it remains on course to raise short-term interest rates this year despite weaker overseas growth and slowing inflation.

The central bank held its key rate at 0 to 0.25 per cent in its first meeting of 2015 and said the US economy is expanding at a “solid” pace with strong gains in employment.

Amid falling energy prices, the Fed said it expects inflation to drop further in the near-term, but then rise back towards 2 per cent as the jobs market improves further.

Falling energy prices “have boosted household spending power,” it said. The statement noted that inflation expectations had fallen substantially in financial markets but that survey measures were stable.

Hikes

The Fed said in December it would be “patient” in raising interest rates, meaning it was unlikely to act for at least the subsequent two meetings of its

Federal Open Market Committee

.

It reiterated that guidance yesterday. That suggests hikes will be off the table at its next meetings in March and April, making June the earliest likely date for a rise.

Its next meeting, on March 17th and 18th, will be a critical moment in terms of its signalling strategy. As expected, the Federal Open Market Committee discarded previous language saying that its guidance was consistent with keeping rates at their low level for a “considerable time” following the October end of its asset purchase programme.

Yields on US government debt, which move inversely to its price, fell after the Fed statement was released. The yield on the 10-year Treasury declined 6.5 basis points to 1.76 per cent, while the yield on the 30-year note fell 7 basis points to 2.33 per cent – a fresh all time low.

The Fed has been seeking to prepare markets for an increase in rates from near-zero levels as the US economy enjoys its strongest growth spurt in more than a decade.

The prospect of higher rates in the US comes even as monetary policy in other jurisdictions goes in the opposite direction.

Sluggish economy

Last week the

European Central Bank

embarked on asset purchases as it attempts to kick-start the euro zone’s sluggish economy.

The Fed said yesterday it would take international developments into account as it gauges monetary policy.

The diverging conditions have led to a sharp rise in the dollar, which is crimping profits in major US companies and could put further downward pressure on inflation as it suppresses import prices.

The Fed has kept short-term rates at near-zero levels since December 2008 alongside its now-finished quantitative easing programme as it attempts to support the recovery.

– (Copyright The Financial Times Limited 2015)