The Fed said it would no longer use a threshold of a 6.5% unemployment rate before it would start to raise short-term interest rates, instead using a combination of employment and inflation indicators.
The Fed also said it would wind down its economic stimulus as expected, saying it will trim its monthly bond purchases by another $10 billion to $55 billion despite recent weakness in the U.S. economy and global turmoil.
"The Fed and Yellen delivered exactly what was expected: Continued the taper, kept short-term rate hikes on hold, tweaked the language of the statement a bit," says Greg McBride, senior financial analyst for Bankrate.com.
The Fed's statement said that rates could remain low for "a considerable time" after its bond purchases end. When asked, Yellen said "a considerable time" was about six months, which sparked a brief market selloff.
Economists expressed surprise that Wall Street would react negatively to the Fed's new guidance. "That still puts us in mid-2015, which isn't much of a surprise," says John Lonski, team managing director at Moody's Analytics.
The central bank downgraded its economic outlook slightly following bad weather that has crimped first-quarter growth, but policymakers also expect a more rapid decline in the unemployment rate.
MARKETS: Stocks dive after Fed policy moves
FIRST TAKE: Fed will still keep rates low a long time
The Fed expects economic growth of 2.8% to 3% this year, down from its December projection of 2.8% to 3.2%. It also slightly lowered its growth forecast for 2015 to 3% to 3.2%.
The unemployment rate, now 6.7%, is projected to fall to 6.1% to 6.3% by year's end. The Fed's previous year-end forecast was 6.3% to 6.6%, but the rate has been dropping much faster than expected.
The Fed! said the change in its guidance on interest rates "does not indicate any change in policy." Fed policymakers still expects to keep interest rates to stay near zero until 2015 after driving them down to that level during the 2008 financial crisis.
FULL TEXT: Federal Reserve's statement
In its statement, the Fed said it "will assess progress—both realized and expected—toward its objectives of maximum employment and 2% inflation." Inflation has been running well below the Fed's 2% target.
"This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments," the Fed added.
Minnesota Fed President Narayana Kocherlakota dissented from the statement, suggesting that the removal of the unemployment threshold "weakens the credibility" of the Fed's commitment to increase economic growth and inflation. Kocherlakota, one of the Fed's more pro-growth policymakers, has called for lowering the threshold to 5.5%.
With today's action on its purchases of treasury bonds and mortgage-backed securities, the central bank has now cut the bond-buying by $10 billion a month at three consecutive meetings since December, lowering the purchases from $85 billion monthly. It is expected to end entirely by the end of the year, barring any setbacks for the economy.
The program is aimed at holding down long-term interest rates and spurring economic and job growth.
Since the Fed began the purchases in September 2012, the unemployment rate has fallen from 8.1%. Although job growth slowed markedly in December and January from a monthly pace of 200,000-plus last fall, payroll gains improved to 175,000 in February.
Despite the markets' brief tantrum over her definition of a "considerable period," experts gave Yellen generally good marks on her first press conference. "Yellen has a lot of experience handling herself with the press, and she's ! doing a g! ood job explaining what the issues are," says Krishna Memani, chief investment officer of OppenheimerFunds.
No comments:
Post a Comment