The Federal Reserve dropped an assurance it will be “patient” in raising interest rates, ending an era in its communications policy and opening the door for higher borrowing costs as early as June.
“An increase in the target range for the federal funds rate remains unlikely at the April” meeting, the Federal Open Market Committee said in a statement Wednesday in Washington. The panel said it will be appropriate to tighten “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Chair Janet Yellen is preparing for an exit from the most aggressive easing in the Fed’s 100-year history as the job market overcomes the damage wrought by the deepest recession since the 1930s. At the same time, inflation and wage growth that remain too low are giving her reasons for caution.
Dropping the pledge to be “patient” marks a shift away from the explicit guidance on the future path of policy that the Fed has used since late 2008 to keep longer-term borrowing costs low. The Fed will now set policy at each meeting based on the latest economic data, making its actions less predictable.
The Fed repeated that it sees “strong job gains” and that labor-market conditions have “improved further.”
Still, the committee lowered its assessment of the economy, saying growth has “moderated somewhat.” In January, it said the economy was “expanding at a solid pace.” Export growth has weakened and the housing recovery remains slow, according to this month’s statement.
Yellen has said the promise to be “patient” means the FOMC would probably wait at least two meetings before raising rates. She will hold a press conference at 2:30 p.m. in Washington. The next FOMC meetings are scheduled for April and June.
The Fed is preparing to tighten even as stagnant growth elsewhere prompts central banks in Europe, China and Japan to ease policy. That has put upward pressure on the dollar, which has jumped more than 4 percent since Fed policy makers last met on Jan. 28, posing a potential headwind to growth as American exports become more expensive.
Fed officials confront conflicting signals from their dual mandates for full employment and price stability as they weigh when to tighten policy for the first time since June 2006.
Surging job gains pushed unemployment down to 5.5 percent in February, the lowest level in almost seven years, suggesting the economy is strong enough to withstand higher borrowing costs.
Payroll gains have averaged more than 200,000 workers for 12 straight months, the longest streak of such increases since March 1995.
“No matter how you cut the cake, you still have an economy running above trend,” said Bricklin Dwyer, an economist at BNP Paribas SA in New York. Absent a threat of deflation, “the economy can handle higher rates.”
Among companies boosting payrolls is Omaha, Nebraska-based Union Pacific Corp. The largest publicly traded railroad in North America plans to hire about 5,700 employees this year amid an improving economy, Chief Financial Officer Rob Knight said this month in an investor conference.