19 April 2024

Fed Sticks to ‘Patient’ Tack on Rate Increases

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Federal Reserve on Wednesday committed to keeping short-term interest rates near zero at least until midyear and set the stage for tough debates in the months ahead about whether to wait even longer. Fed Chairwoman Janet Yellen said in December the reference to patience means the central bank isn’t likely to raise rates at its next two policy meetings. By including it Wednesday, the Fed has taken a rate increase off the table for its March and April policy meetings, but remained open to a move at their June 16-17 meeting.

Whether June remains a possibility for a rate increase will depend on how the economy and financial markets behave in the weeks and months ahead. The Fed’s policy statement acknowledged the complex cross-currents it confronts as it plots a course for later in the year.

Officials want inflation expectations to be stable. A decline in TIPS inflation compensation could be a signal that investors expected consumer price increases will continue to run below its 2% objective. Many officials have publicly played down movements in TIPS markets of late, noting that surveys of households and businesses suggest inflation expectations are stable. The statement did note that these survey measures “have remained stable.” But the reference to sharp drops in TIPS yields show Fed officials are watching this issue closely.

Ms. Yellen won approval of the statement in a unaminous 10-0 vote. The relatively uneventful meeting sets the U.S. central bank on a course for harder decisions at its March 17-18 policy gathering.

Officials at that time will update their forecasts for economic output, inflation, unemployment and interest rates. They also need to decide whether to formally open the door to rate increases in June by removing or altering the patience language from their official statement.

They are facing a challenging economic backdrop. Though the unemployment rate has fallen faster than most Fed officials expected and growth appears to have picked up, the inflation rate has been below the Fed’s 2% target for 31 straight months and is on track to fall further because of declining oil prices.

Meantime, while Fed officials contemplate rate increases later this year, many other global central banks are easing monetary conditions to combat their own problems with low inflation and slow growth.  The brewing disconnect between the Fed and other central banks could unsettle markets and complicate the U.S. central bank’s calculus.

Click here to access the full article on The Wall Street Journal. 

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