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Fed is expected to remain 'patient' about a first rate hike

Created: 01/28/2015 6:21 AM
By: By MARTIN CRUTSINGER

WASHINGTON (AP) — As the Federal Reserve ends its latest policy meeting Wednesday, it is widely expected to repeat the pledge it made in December: That it will be "patient" in raising interest rates from record lows.

That pledge could endure well into 2015.

The U.S. economy has steadily improved. Yet inflation has dipped further below the Fed's target rate, thanks to plunging oil prices and a surging dollar. The stronger dollar makes foreign goods cheaper in the United States.

The statement that Chair Janet Yellen and her colleagues will issue after the meeting will be scrutinized for any possible clues to a shift in Fed policy. The statement will be all that investors will have to digest because there will be no Yellen news conference after this meeting and no updates to the Fed's economic forecasts.

At the Fed's last meeting in December, its statement said officials thought they could be "patient" in moving to raise their key short-term rate, which has been kept at a record low near zero for six years.

Most economists foresee no rate hike until June at the earliest. And given recent developments, some economists are starting to push back their predicted timetable for the first rate hike to September or December.

Economists at Morgan Stanley say they now think the first rate hike won't occur until March 2016. Other economists say they still expect the first increase to come this year.

"The Fed does have more latitude, given the rise in the dollar and the collapse in oil prices," said Mark Zandi, chief economist at Moody's Analytics. "But I still think the first rate increase will come in June."

Complicating the Fed's timetable is the European Central Bank's just-announced plan to pump 1 trillion euros into its ailing economy. That flood of cash should keep the eurozone's rates ultra-low. Many investors may respond by shifting into higher-yielding U.S. Treasurys. That would strengthen the dollar even more and could push U.S. inflation further below the Fed's 2 percent target.

Under that scenario, the Fed might find it hard to justify a rate hike, which risks weakening the economy and slowing inflation further.

"Standing pat is the best thing to do right now," said David Wyss, an economics professor at Brown University.

Even before the ECB acted last week, anticipation of its move had helped cut the euro's value to a decade-long low against the U.S. dollar. The dollar is also being driven up by strengthening U.S. economic growth.

The plunge in world oil prices, which have fallen 60 percent since June, has contributed to lower inflation even as the U.S. job market has been reviving.

After years of subpar growth, the economy added nearly 3 million jobs added last year, enough to cut the unemployment rate to 5.6 percent. That is just above the Fed's goal of 5.2 percent to 5.5 percent unemployment.

But Yellen and other Fed officials have pointed to other factors — such as weak pay growth and a still-high number of part-time workers who can't find full-time jobs — as evidence that more must be done to achieve a healthy job market.

Prices rose just 1.2 percent in the 12 months that ended in November, according to the Fed's preferred gauge of inflation. When inflation is too low, consumer spending can slow as people delay purchases on the assumption that the same or lower prices will be available later. The biggest fear is deflation — a broad decline in prices and income that can further restrain spending and even tip an economy into recession.

Yellen, who is completing her first year as Fed chair, has had to deal with scattered dissents — from both "doves" who feel more should be done to spur job growth and "hawks" who worry that prolonged low rates could fuel future high inflation.

Two vocal hawks, Charles Plosser, head of the Fed's regional bank in Philadelphia, and Richard Fisher, his counterpart in Dallas, no longer have votes this year under the rotation system for Fed bank presidents. Both are retiring from the Fed in March. The new set of voters lean to the "dovish" camp.

At her December news conference, Yellen said the use of "patient" in describing the timing of a rate hike meant there would be no increase for at least the next couple of meetings. The next two meetings are in March and April followed by a session on June 16-17.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, is looking for a delay to September or possibly not until year's end.

"My question is, what's the rush?" Sohn said. "We are not running a lot of additional risks by keeping rates low, while if they raise rates prematurely they could derail economic growth."

(Copyright 2015 by The Associated Press. All Rights Reserved.)



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