Federal Reserve to take ‘patient’ approach to interest rate hike

WASHINGTON – The Federal Reserve is edging closer to raising interest rates from record lows given a strengthening U.S. economy. But it will be “patient” in deciding when to do so.

That was the message sent Wednesday as the Fed ended a meeting amid heightened expectation about a forthcoming rate increase. At a news conference afterward, Chair Janet Yellen said she foresaw no rate hike in the first quarter of 2015.

The Fed said in a statement that a “patient” approach to raising rates is consistent with its previous guidance that it would keep its key rate near zero for a “considerable time.”

Yellen said the strength of U.S. economic data and the level of inflation, not a calendar date, will dictate when it raises rates. At a time of global economic turmoil and collapsing oil prices, she stressed that the Fed was making no policy changes.

The Fed chair said she’s prepared to let the U.S. unemployment rate fall from its current 5.8 percent to exceptionally low levels because doing so could help cause inflation to rise closer to the Fed’s 2 percent target.

Stock investors cheered the Fed’s message. The Dow Jones industrial average, which had been up about 160 points before the Fed issued its statement, roared higher to close up 280 points. The stock market tends to applaud low rates because they make it easier for individuals and businesses to borrow and spend, and they cause many investors to shift money into stocks in search of higher returns.

Most economists think the Fed’s first rate increase will occur in June as long as its inflation outlook doesn’t remain persistently below its target rate of 2 percent. In an updated economic forecast Wednesday, the Fed lowered its inflation forecast for next year to between 1 percent and 1.6 percent.

Energy prices have plunged since the Fed last met in October, with oil reaching a five-year low. That price drop is reducing inflation further below the Fed’s 2 percent target, which could heighten the pressure to delay a rate hike until inflation rebounds. On Wednesday, the government said consumer prices rose just 1.3 percent in November compared with 12 months ago.

But Yellen noted that oil price spikes in the past had only temporarily raised inflation and suggested that a corresponding drop will likely also have only a “transitory” effect on inflation.

She was more optimistic about the benefits of lower oil prices for the U.S. economy.

“The decline we have seen … is likely to be on net a positive,” Yellen said. “It’s something that’s certainly good for families, for households. It’s putting more money in their pockets… It’s like a tax cut that boosts their spending power.”