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HindustanTimes Sat,02 Aug 2014

Fed revamps rates guidance, trims bond buys further

Reuters  Washington, March 19, 2014
First Published: 23:50 IST(19/3/2014) | Last Updated: 23:55 IST(19/3/2014)

The Federal Reserve on Wednesday dropped the US unemployment rate as its definitive yardstick for gauging the economy's strength, and made clear it would rely on a wide range of measures in deciding when to raise interest rates.

At the same time, it said that dropping a promise to hold rates steady "well past the time" the US unemployment rate falls below 6.5 percent did not indicate any change in the Fed's policy intentions.

"The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run," the Fed said after its two-day meeting, the first chaired by Janet Yellen, who took the helm of the central bank on February 1. She is set to hold a news conference at 2:30 p.m. (1830 GMT).

The central bank also proceeded with its well-telegraphed reductions to its massive bond-buying stimulus, announcing it would cut its monthly purchases of US treasuries and mortgage-backed securities to $55 billion from $65 billion.

Minneapolis Fed president Narayana Kocherlakota dissented, saying that dropping the threshold could hurt the credibility of the Fed's commitment to return inflation to 2 percent.

The decision to continue to scale back its stimulus keeps the Fed on track for the measured wind down laid out by Yellen's predecessor, Ben Bernanke. The Fed repeated that it plans to continue trimming the asset purchases in "measured steps" as long as labor conditions continue to improve and inflation shows signs of rising back toward the Fed's 2-percent goal.

The Fed's assessment of the US economy chalked up recent weakness to adverse weather.

The Fed had said since December 2012 that it would not consider raising short-term rates until the jobless rate dropped to at least 6.5 percent, as long as inflation looked set to remain contained.

But the unemployment rate has fallen faster than anticipated, in part because of discouraged job hunters giving up the search, and officials think the economy is still far from ready for higher borrowing costs.

Of the Fed's 16 policymakers, only one believes it will be appropriate to raise rates this year; 13 expect a first rate hike next year, and 2 others see the first rate hike coming in 2016, according to fresh forecasts published on Wednesday. But once rate hikes start, Fed officials see slightly sharper increases than they did in December, with rates ending 2015 at 1% and ending 2016 at 2.25%, according to the median of forecasts.

In December, Fed officials expected short-term rates to be just 1.75% by the end of 2016.

The new forecasts also show Fed officials see unemployment dropping slightly faster, to between 5.6% and 5.9% by the end of 2015. In December their forecasts called for unemployment falling to between 5.8% and 6.1% by the fourth quarter of 2015.

Keeping markets in line
The Fed has kept overnight rates near zero since December 2008 and has bought more than $3 trillion in long-term debt to keep borrowing costs down and spur investment and hiring.

It began to scale back its stimulus in December, announcing it would trim its monthly bond purchases by $10 billion, after it saw the economy pick up speed in the fall. In January, the Fed said it would cut the purchases by a further $10 billion.

At the same time, it has sought to tamp down any market expectations that rate rises will soon follow with its so-called forward guidance. But as the actual jobless rate neared the threshold, officials began to seek a more durable way to telegraph their view on when they will tighten monetary policy.

They want to keep market expectations aligned with their own forecasts. If traders start to price in earlier rate hikes, the result would be tighter financial conditions that could deter the very investment and hiring that the Fed wants to promote.

Many Fed officials, including Yellen, have said recent weakness in economic data, from jobs and retail sales to industrial production and home building, appears largely due to the unusually harsh winter and should soon dissipate.


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