Fed signals plan to keep key interest rate low

WASHINGTON – The Federal Reserve signaled Wednesday that it plans to keep a key interest rate at a record low because a broad range of U.S. economic measures remain subpar.

The Fed said it intends to keep its benchmark rate near zero as long as inflation remains under control, until it sees consistent gains in wage growth, long-term unemployment and other gauges of the job market.

The central bank retained language signaling its plans to keep short-term rates low “for a considerable time” after it ends its monthly bond purchases after its next meeting in October.

“In the Fed’s mind, the economy still has work to do, but it’s improving,” said Mike Arone, an investment strategist with State Street Global Advisors.

Stock prices rose after the Fed issued a statement at 2 p.m. Eastern time after a two-day policy meeting, and the Dow Jones industrial average closed up about 25 points to a record high.

The yield on the 10-year Treasury note edged up to 2.62 percent from 2.59 percent late Tuesday.

In its statement, the Fed said it will make another $10 billion cut in the pace of its Treasury and mortgage bond purchases, which have been intended to keep long-term borrowing rates low.

It also clarified the process by which it will eventually unwind its low-rate policies. The Fed said it would first increase its key short-term rate before it stops reinvesting its bond holdings, which have driven the Fed’s balance sheet to a record of nearly $4.5 trillion.

On Wednesday, the central bank also issued updated forecasts for growth, inflation and interest rates. The median short-term rate supported by Fed policymakers at the end of 2015 is now 1.38 percent, up from 1.13 percent at its June meeting. This suggested pressure from some Fed officials for a faster rate increase than the Fed’s statement implied.

The Fed also expects slower growth this year and next than in its last projections issued in June. It predicts that the economy will grow about 2.1 percent this year, down from its June forecast of roughly 2.2 percent. That reduction likely reflects the sharp contraction in the first quarter of this year. The economy has rebounded solidly since then.

On the eve of the Fed’s meeting this week, the financial world had been on high alert for whether the Fed would reiterate that it expects to keep its key short-term rate near zero for a “considerable time” after the bond buying ends.

With job growth solid, manufacturing and construction growing and unemployment at a near-normal 6.1 percent, many analysts had suggested that the Fed was edging closer to a rate increase to prevent a rising economy from igniting inflation.

The number of U.S. job openings is near its highest level in 13 years. Layoffs have dwindled. And consumer confidence has reached its highest point in nearly seven years.

Despite the signs of a stronger economy, most economists think the first increase in the Fed’s short-term rate won’t occur until mid-2015.

The Fed’s new statement retained language stating that a range of labor market indicators “suggests there remains significant underutilization of labor resources.”

Meeting with reporters after the Fed meeting, Chair Janet Yellen said she still thought the job market has yet to recover fully.

“There are still too many people who want jobs but cannot find them, too many who are working part-time but would prefer full-time work and too many who are not searching for a job but would be if the labor market were stronger,” Yellen said.

The Fed made only minor changes to its previous statement in its assessment of the economy. The statement was approved on an 8-2 vote.

The dissents came from Charles Plosser, president of the Fed’s Philadelphia regional bank, who had dissented at the last meeting, and Richard Fisher, president of the Dallas regional Fed bank. Both are viewed as “hawks” – Fed officials who are concerned about the threat of future inflation and believe the Fed should be moving more quickly to raise rates.

Asked at her news conference whether she had concerns about the dissents, Yellen noted that the committee had approved the policy statement by “an overwhelming majority, and I don’t consider the level of dissent to be surprising or very abnormal.”

In response to another question, Yellen said it could take until the end of the decade to shrink the Fed’s investment holdings to more normal levels. Because of all its bond buying to try to drive down long-term rates, the Fed’s balance sheet stands above $4.4 trillion – more than four times its level before the financial crisis hit in 2008.