Federal Reserve to wait on rate hikes

WASHINGTON – After holding interest rates at record lows for more than six years, the Federal Reserve still isn’t ready to start raising them.

The Fed signaled Wednesday that it needs the job market to improve further and inflation to rise above low levels before it begins nudging borrowing rates up. Even then, it suggested it will do so only very gradually.

The statement the Fed issued after its latest policy meeting seemed to catch investors by surprise in suggesting that a rate increase might be further off than many had assumed. Stock prices jumped, and bond yields fell.

The Dow Jones industrial average, which had been down nearly 100 points before the statement was issued, closed up 227 points, or 1.3 percent. The yield on the 10-year Treasury note, which influences long-term mortgage rates, tumbled from 2.04 percent just before the Fed’s announcement to 1.92 percent.

In its statement and later in Chair Janet Yellen’s news conference, the Fed expressed concerns despite the economy’s steady growth. Yellen pointed to lower energy prices and a surging U.S. dollar, which is helping keep inflation excessively low and posing a threat to U.S. corporate profits and possibly to the economy. A Fed rate increase would likely send the dollar even higher.

At the same time, the Fed at least opened the door to a rate increase later this year by no longer saying it will be “patient” in starting to raise its benchmark rate. Complicating its decision is that other big central banks – from Europe to Japan to India – are either cutting rates or embarking on stimulus programs to try to boost their struggling economies.

At her news conference, Yellen stressed that while the Fed had removed “patient” to describe its approach to raising rates, it still hadn’t decided when to begin raising them.

“Just because we removed the word ‘patient’ from the statement,” Yellen said, “doesn’t mean we’re going to be impatient.”

The Fed has kept its key short-term rate near zero since late 2008 to try to bolster the economy after a devastating financial crisis and recession. In its statement, the Fed noted that the economy, which it previously said was growing solidly, has “moderated somewhat.”

Patrick Maldari, a senior fixed-income specialist at Aberdeen Asset Management, said the Fed appears to be in no hurry to raise short-term rates.

“They went out of their way to talk about weakness in export growth, weakness in energy prices,” Maldari said.

Michael Gregory, deputy chief economist at BMO Capital Markets, said he foresees a rate increase in the second half of the year. But he cautioned, “There is now some probability that the Fed does nothing this year.”

On Wednesday, the Fed’s statement was approved on a 10-0 vote.

Also Wednesday, the Fed downgraded its quarterly economic forecasts. It cut its estimate of growth this year to a range of 2.3 percent to 2.7 percent, from an estimate of 2.6 percent to 3 percent in its previous forecast in December. It was an acknowledgement that some key indicators have been weaker than expected in recent months.