- In a new statement, the Federal Reserve hints that it could start raising interest rates soon — perhaps as early as June.
- The stock market reacted positively to the news, rising about 1 percent in the hour after the release.
- The Fed is projecting that the unemployment rate will average between 5.0 and 5.2 percent in 2015. The current rate is 5.5 percent.
- The Fed is projecting low inflation over the next couple of years. It expects inflation to be below 0.8 percent in 2015 and below the Fed’s 2 percent target in 2016.
Interest rates have been at zero for years
The traditional way the Fed has managed the economy is by manipulating short-term interest rates. Lower interest rates encourage borrowing and make it easier for businesses to invest and grow. But since the 2008 financial crisis, the Fed has been keeping short-term rates near zero.
But with the economy recovering, the Fed is widely expected to raise interest rates for the first time in more than six years. The only question is when this will happen.
In its January meeting, the Fed signaled that interest rate hikes were not imminent. “The Committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the central bank said in its typical bureaucratic prose.
In today’s statement, the committee said something more specific: “The Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.” That stuff about being “patient” is gone. And the statement that the Fed won’t raise rates in April sure sounds like a hint that it will raise them in the meeting after that — in June.
But in a press conference following the statement’s release, Fed Chair Janet Yellen encouraged people not to read too much into the change. “Just because we removed the word ‘patient’ doesn’t mean we’re going to be impatient,” she said.
Another part of the latest Fed statement also suggests the Fed could wait longer. Today’s statement says the Fed won’t raise rates until it “has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
The stock market has reacted positively to the news, with the S&P 500 up about 1 percent for the day. Ordinarily, news that interest rate hikes are coming would trigger a fall in stock prices. The fact that markets rose instead may reflect relief that the Fed didn’t send a stronger signal that higher rates were coming.
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