US Federal Reserve plans to tighten monetary policy

Decision shows Fed’s confidence in strong US growth as economy enjoys good run

In recent months the US economy has enjoyed its best run of data since the end of the recession in 2009 as consumers start responding to a plunge in oil prices

In recent months the US economy has enjoyed its best run of data since the end of the recession in 2009 as consumers start responding to a plunge in oil prices

 

The US Federal Reserve sent a strong signal that it expects to tighten monetary policy by the middle of 2015 as it dropped its forecast that it will keep low interest rates for a “considerable time”.

But the rate-setting Federal Open Market Committee said it can be “patient” in judging when to start raising rates, in new language designed to reassure markets that rate rises are not imminent.

The S&P 500 climbed and the dollar was little changed against the euro at $1.2421.

The decision to drop “considerable time” despite global market turmoil shows the Fed’s confidence in strong US growth and its desire to prepare financial markets for tighter monetary policy next year.

But in a carefully weighted statement that prompted three dissents – passing by seven votes to three – the committee said the new guidance was consistent with the old. It suggests the Fed is looking at a first rate rise in June 2015. The committee also forecast a slower pace of rate rises in 2015 and 2016.

Instead of expecting interest rates of 1.25 to 1.5 per cent by the end of 2015, the committee now forecasts them to be between 1 and 1.25 per cent. That suggests four quarter point rate rises next year instead of five. Instead of rates at 2.75 to 3 per cent by the end of 2016, the Fed now expects rates at 2.5 per cent.

Two dissenters thought the statement was not tough enough and one believed it to be too strong.

Best run

The Fed made almost no change to its growth forecasts, but moved its predictions for unemployment and inflation down, reflecting rapid progress in the jobs market and falling oil prices.

Unemployment rate

Richard Fisher, the Dallas Fed president, thought the central bank should signal earlier rate rises; Charles Plosser president of the Philadelphia Fed objected to saying the new language was consistent with the old; and Narayana Kocherlakota president of the Minneapolis Fed thought the committee was not doing enough to bring inflation back to 2 per cent.

– Copyright The Financial Times Ltd 2014