Fed intends to keep rates near zero
Print Edition
JANET Yellen tried at her first news conference as Federal Reserve chair to clarify a question that’s consumed investors: When will the Fed start raising short-term interest rates from record lows?
Yellen stressed that with the job market still weak, the Fed intends to keep short-term rates near zero for a “considerable” time and would raise them only gradually. And she said the Fed wouldn’t be dictated solely by the unemployment rate, which Yellen feels overstates the health of the job market and the economy.
Those points reinforced a message the Fed delivered in a policy statement after ending a two-day meeting on Wednesday. The statement said that even after it raises short-term rates, and even after the job market strengthens and inflation increases, the Fed expects its benchmark short-term rate to stay unusually low.
The Fed also said it will cut its monthly long-term bond buying by US$10 billion to US$55 billion because it thinks the economy is steadily healing.
But Yellen might have confused investors when she tried to clarify the Fed’s timetable for raising short-term rates. She suggested the Fed could start six months after it halts its monthly bond purchases, which most economists expect by year’s end. That would mean short-term rates could rise by mid-2015.
A short-term rate rise would elevate borrowing costs and could hurt stock prices. Stocks fell after Yellen’s mention of six months. The Dow Jones industrial average ended the day down more than 100 points.
The Fed’s latest statement said its benchmark short-term rate could stay at a record low “for a considerable time” after its monthly bond purchases end. The Fed has been gradually paring its bond purchases, which have been intended to keep long-term loan rates low.
“This is the kind of term it’s hard to define,” Yellen said of “considerable time.”
“Probably means something on the order of six months, or that type of thing.”
Though stocks sold off after that remark, the Fed’s statement and Yellen’s comments made clear that borrowing rates for consumers and businesses could remain low for many more months. Yellen also stressed that rate increases, once they occur, would occur only incrementally.
Some analysts said they thought Yellen’s reference to six months didn’t really change expectations for the timing of the Fed’s first rate increase.
“We’re not sure the comments suggest rates would begin to rise any earlier than the mid-2015 date already priced into rate futures markets,” Paul Ashworth, chief US economist at Capital Economics, said in a note.
Yellen devoted much of her news conference to explaining why the economy still needed a boost from the Fed. She stressed that low inflation and meager pay raises for many workers reflected a weaker recovery than the decline in the jobless rate might indicate.
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