The Federal Reserve in its latest meeting has paved the way for a rate increase but its policy statement showed that the central bank was not in a hurry to hike rates.
The US central bank had dropped the word ‘patient’ from its statement signalling that it would be comfortable in increasing interest rates as long inflation returns to its 2% target and the job market keeps on improving.
“An increase in the target range for the federal funds rate remains unlikely at the April meeting” the Federal Reserve said in its statement.
The Fed’s Chair Janet Yellen is preparing for an exit from the most aggressive easing in the Fed’s 100-year history as the job market overcomes the damage wrought by the deepest recession since the 1930’s.
According to the Wall Street Journal, by dropping the word ‘patient’ from its policy statement , the Fed has left open the possibility of a rate increase in June or later.
“The change in forward guidance does not indicate that the Fed has decided on the timing of the initial increase in the target,” said the Fed in its statement.
Dropping the pledge to be ‘patient’ marks a shift away from the explicit guidance on the future path of policy that the Fed has used since late 2008 to keep longer-term borrowing costs low. The Fed will now set policy at each meeting based on the latest economic data, making its actions less predictable.
The Fed is preparing to tighten even as stagnant growth elsewhere prompts central banks in Europe, China and Japan to ease policy. That has put upward pressure on the dollar, which has jumped more than 4 percent since Fed policy makers last met on Jan. 28, posing a potential headwind to growth as American exports become more expensive.
Surging job gains pushed unemployment down to 5.5 % in February, the lowest level in almost seven years, suggesting the economy is strong enough to withstand higher borrowing costs.
The American economy grew at a 2.2 % annualized rate in the three months ended December after a 5 percent jump in the third quarter that was the biggest in 11 years.
Ranjit Singh
Thu Mar 19 2015
The Federal Reserve in its latest meeting has paved the way for a rate increase.
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