The Federal Reserve is going to take its sweet time raising interest rates. And the market couldn’t be happier.
The central bank said Wednesday afternoon that it would be “patient in beginning to normalize the stance of monetary policy” and added that this new language is consistent with earlier statements that it plans to keep interest rates low for a “considerable time.”
Oh J-A-N-E-T, I love you so. Investors had been hoping the Fed would keep the “considerable time” phrase in its statement. By doing so, it appears that the Fed is signaling that it is unlikely to begin raising interest rates until sometime in the summer of 2015 or later.
Stocks, which were already trading higher Wednesday before the Fed’s announcement, surged further. The Dow is trading nearly 300 points higher.
Bond investors aren’t convinced that the Fed is ready to put on its rate hiking boots either. The yield on the 10-Year Treasury is currently hovering around 2.12%. That’s near the low point for the year. Bond rates should eventually move higher once the Fed starts tightening monetary policy.
It’s interesting to note that three Fed members dissented from today’s decision.
How we got here. The Fed slashed interest rates to near zero in December 2008 at the height of the Great Recession and has kept them ever since in an effort to stimulate the economy.
But the central bank started to cut back on its crisis-era bond purchase program, known as quantitative easing or QE, earlier this year as the economy improved.
In October, the Fed finally ended QE.
That’s why much of the focus on the Fed this year has revolved around the timing of its next interest rate increase.
The last time the Fed hiked rates was way back in June 2006.
When will the Fed raise rates? Some of the recent stock market volatility could be attributed to concerns that the Fed could push up the first rate hike to the spring because of the improvement in the job market and other parts of the economy during the past few months.
But oil and gas prices have plunged lately. As a result, consumer prices rose at their slowest rate in nearly six years last month. The Fed said Wednesday though that it expects the impact of lower energy prices to be “transitory.”
The Fed has long maintained that its goal is for annual inflation of around 2%. Overall consumer prices are up just 1.3% during the past 12 months.
Even when you toss out volatile energy and food prices, the so-called core inflation rate is 1.7% — still below the Fed’s target.
The Fed also released new economic projections on Wednesday. Fed members slashed their inflation outlook for 2015, but they expect the economy to grow more next year, and they indicated that they expect the unemployment rate to fall even further than originally expected.
