Fed Vows Patience on Rates, Drops ‘Considerable Time’

The Federal Reserve said it will be patient on the timing of the first interest-rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised its assessment of the labor market.

“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee said Wednesday in a statement in Washington, replacing a calendar-based phrase with language that gives it more flexibility to respond to economic data. It said the new guidance is “consistent” with its previous “considerable time” wording.

The reference to “patience” signals policy makers “are trying to give themselves more flexibility,” said Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “This puts the onus on the data and they can interpret what patience means.”

The labor market “improved further,” the Fed said. “Underutilization of labor resources continues to diminish,” it said, dropping the word “gradually” used in its previous statement.

Stocks extended gains and Treasury yields were higher after the Fed’s announcement. The Standard & Poor’s 500 Index rose 1.5 percent to 2,002.18 as of 2:56 p.m. in New York. The 10-year Treasury note yielded 2.13 percent, a gain of seven basis points.

‘Range of Views’

In a press conference following the statement, Fed Chair Janet Yellen said central bankers will react to economic data as they unfold.

While the Fed is “unlikely to begin normalization process for at least the next couple of meetings,” she said, “the timing of the initial rise in the fed funds target as well as the path for the target thereafter are contingent on economic conditions.”

The change in guidance is another step in the Fed’s plan to exit from the loosest monetary policy in its 100-year history. While a faster-than-expected drop in unemployment is pushing the central bank toward raising rates next year, plunging prices of oil and commodities are holding inflation below its target.

“The committee continues to monitor inflation developments closely,” the FOMC said. It expects inflation to “rise gradually toward 2 percent.”

Russian Crisis

Today’s statement didn’t mention global market turmoil sparked by oil and the Russian currency crisis.

“They are looking through all that,” Bryson said. “They want the focus on the U.S. economy.”

Quarterly forecasts released by the Fed today show officials see interest rates rising more slowly over the next two years compared with their September estimates. They also see the economy reaching full employment later next year, while inflation remains below their target at 1 percent to 1.6 percent.

Restating language introduced in October, the FOMC said evidence of faster progress toward its goals of full employment and price stability could accelerate the timing of a rate increase, while disappointing figures could delay it.

The Fed repeated it will continue reinvesting proceeds from its bond portfolio until after interest rates start to rise. Three rounds of so-called quantitative easing have swollen the Fed’s balance sheet to a record $4.49 trillion. The central bank stopped purchases at the end of October.

Three Dissents

Minneapolis Fed President Narayana Kocherlakota, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher all dissented. Kocherlakota said the decision “created undue downside risk to the credibility of the 2 percent inflation target.”

Plosser said the statement shouldn’t say the new forward guidance is consistent with the previous statement, and Fisher said the improvement in the economy has moved forward the date when it will be appropriate to raise rates.

Officials met as the Russian currency crisis highlighted risks to the U.S. from the rest of the world that also include slower growth in China, a recession in Japan and the threat of deflation in Europe.