THE United States Federal Reserve (Fed) on Wednesday renewed its pledge to keep interest rates near zero for a “considerable time”, but also indicated it could raise borrowing costs faster than expected when it starts moving.
Many economists and traders had expected the central bank to alter the rate guidance it has provided since March, given generally improving data on the economy’s performance.
But the Fed repeated its assurance that rates would stay ultra-low for a “considerable time” after a bond-buying stimulus programme ends.
In a statement after a two-day meeting of its policy-setting Federal Open Market Committee (FOMC), it announced a further US$10 billion (RM32.24 billion) reduction in its monthly purchases, leaving the programme on course to be shuttered next month.
The statement was virtually unchanged from July, though new quarterly projections released with it showed the central bank’s view on where interest rates should be in future years is diverging from where financial markets have bet they will be.
“While the much analysed phrase ‘considerable time’ remained in the FOMC statement, the
newly-announced scheme for interest rate normalisation shows that higher rates are on the cards,” said John Kilduff, a partner at Again Capital LLC in New York.
The Fed has held benchmark overnight rates near zero since December 2008 and has more than quadrupled its balance sheet to US$4.4 trillion through a series of large-scale bond purchase programmes.
In a further sign the central bank is in no rush to start raising rates, FOMC repeated its assessment that a “significant” amount of slack remains in the US labour market.
Stocks were little changed after the statement, but the dollar hit its highest level against the yen since September 2008. Yields on US Treasury bonds rose to session highs as traders moved to price in the possibility of higher future rates.
The most significant change was the new rate projections, which suggested officials were positioning themselves for a potentially faster pace of rate hikes than they had envisioned when the last set of forecasts were released in June.
Fed chair Janet Yellen played down the shift in a news conference.
“I would say there is relatively little upward movement in the (federal funds rate) path. I would view it as broadly in line with what one would expect with a very small downward reduction in the path for unemployment and a very slight upward change in the projection for inflation.”
The Fed also released a new blueprint on how it plans to exit the extraordinary monetary stimulus put in place to combat the 2007-2009 financial crisis and recession. Reuters