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Federal Reserve will remain “patient” on interest rates

Federal Reserve Chairman Janet Yellen last month said that by using the word “patient,” the Fed intended to signal that there would be no rate increase for at least two meetings.
Federal Reserve Chairman Janet Yellen last month said that by using the word “patient,” the Fed intended to signal that there would be no rate increase for at least two meetings. AP

The Federal Reserve reiterated Wednesday that it will be “patient” in raising interest rates from record lows even as the U.S. economy moves steadily closer to full health.

The Fed signaled in a statement after its latest policy meeting that no rate increase is imminent despite the economic gains. A key reason is that inflation remains well below the Fed's target rate.

And it said the pressures holding down inflation — mainly plunging oil prices — have intensified. The Fed said it thinks inflation will decline further before eventually reaching the central bank's 2 percent target rate.

Yet the Fed sketched a brightening picture of the economy — with a strengthening job market, lower unemployment, rising consumer spending and higher household purchasing power fueled by lower energy prices.

Paul Ashworth, an economist at Capital Economics, said the statement suggests that the Fed “is still taking the view that the collapse in oil prices is a net positive for the economy.” The Fed's statement also made clear that policymakers still think the impact of low oil prices on inflation will be temporary, he said

The statement was approved on a 10-0 vote.

On Wall Street, stocks fell after the Fed's statement was issued in mid-afternoon, though prices were also pressured by the continued fall in oil prices.

The Fed's emphasis on low inflation could affect when it decides to raise its key short-term rate from near zero. Many economists have forecast a rate hike in June, but some have pushed back their predicted timetable.

The Fed's statement did not explicitly mention the weakening global economy. But it did say the Fed planned to take “international developments” into account in determining when to start raising rates.

The U.S. economy's steady growth and a strengthening job market would normally argue for a move to begin raising rates to prevent high inflation. The Fed has kept its benchmark rate near zero since 2008 to encourage borrowing, spending and investment and support the recovery from the Great Recession. The Fed's key rate affects rates on many consumer and business loans.

But the concerns about global economic weakness and low inflation have raised doubts about when the Fed's first rate increase will occur. A growing number of economists say the date could slip to September or even later. Economists at Morgan Stanley this week pushed back their forecast for the first rake hike to March 2016 because of the factors holding inflation down.

Chair Janet Yellen said last month that by using the word “patient,” the Fed intended to signal that there would be no rate increase for at least two meetings. That would mean that if officials want to signal that a rate hike is coming in June, they would need to alter the “patient” wording at their next meeting in mid-March.

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