Fed to keep interest rate at record low for 'considerable time'

 

The Federal Reserve on Wednesday pledged to keep interest rates near zero for a “considerable time” after its bond purchases likely end next month.

ADVERTISEMENT

While the central bank continued to shrink its “quantitative easing” program with an eye toward eliminating it in October, officials gave no indication they were prepared to hike interest rates anytime sooner than previously expected, amid lingering concern about the economic recovery.

Some Fed watchers had expected the Fed to scrap the “considerable time” language, seen in the Fed’s June statement, amid a run of solid economic data. But Fed Chairwoman Janet Yellen reaffirmed Wednesday that the Fed thinks the economy could benefit from lower rates for a longer period of time.

“The labor market has yet to fully recover,” she said at a press conference following the Fed meeting. “Economic conditions may for some time warrant keeping the target federal funds rate below levels the committee views as normal over the longer run.”

But at the same time, Yellen took pains to emphasize that investors and the public should not interpret the Fed’s stance as solemn vow, and that any Fed actions will heavily rely on incoming economic information.

“If events surprise us, and we’re moving more quickly towards our objectives…I do feel that we have the flexibility to move,” she said. “It is important for markets to understand that there is uncertainty, and the statement is not some sort of firm promise.”

The Fed noted in its latest policy statement that the economy continues to grow moderately, but, in a nod toward the struggles still felt by many of the unemployed and underemployed, said that there is a “significant underutilization of labor resources.”

Yellen said in her remarks there still remained significant slack in the labor market, as too many people are either unemployed, underemployed or have given up looking for work.

Nonetheless, the focus of much of Yellen’s remarks was on how the Fed would eventually return to a more normal policy, after spending years taking unprecedented steps to try to recover from the recession and financial crisis.

While emphasizing that the Fed wants to support the economy as long as is necessary, Yellen noted that the eventual goal is to return to more normal terrain, when raising and cutting interest rates are the Fed’s primary economic levers.

The Fed has consistently trimmed the size of its monthly bond purchases since announcing plans to exit from the unprecedented stimulus. The central bank went through three rounds of “quantitative easing” after the recession, as near-zero interest rates failed to spur on the economy efficiently.

But with the recovery seemingly taking hold, the Fed has shrank the size of its monthly purchases by $10 billion ever since announcing the wind-down at the end of 2013. Now buying just $15 billion a month, Yellen said the Fed will likely end the purchase program at its October meeting barring any economic surprises.

With that stimulus close to an end, all of the attention on Wall Street has turned toward when the Fed could hike interest rates for the first time since the financial collapse. At the close its previous meeting, the Fed said it expected it would keep rates down for a “considerable time” after the purchases end.

While some Fed watchers had suspected the central bank could trim that lengthy language in its latest statement, the Fed instead underlined its support for low rates by keeping the language intact.

Alongside that accommodative stance, the Fed also released economic projections from Fed officials that showed a slightly gloomier economic outlook. Fed officials expected the economy to grow slightly more slowly in the coming years than they did at their June meeting, although they also expected the unemployment rate to fall more quickly than they did in June.

Nonetheless, the Fed also noted that it would soon be returning to more typical operations. In addition to its latest policy statement and updated economic projections from Fed officials, the central bank also released a set of principles for bringing its monetary policy back under more normal conditions.

Additional information released by the Fed showed that 14 of the 17 Fed members anticipated the Fed would raise rates sometime in 2015.

A pair of voting Fed members – Charles Plosser from the Federal Reserve Bank of Philadelphia and Richard Fisher of Dallas — dissented from the latest policy statement, and pushed for the Fed to take a more aggressive stance on raising rates.

--This report was updated at 4:09 p.m.