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Stock market likes what Fed says on rates

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Posted at 2:25 PM, Sep 17, 2014
and last updated 2014-09-17 14:25:21-04

NEW YORK — Wall Street may be able to exhale. The Federal Reserve is probably not going to raise interest rates until the summer of 2015 at the earliest.

But it also gave new guidelines for how it plans to end the stimulus efforts it has had in place since the 2008 credit crisis and return interest rates to more normal levels.

The Fed said Wednesday that it continues to believe rates should remain low for a “reasonable time” after its bond buying program is complete — which should happen following its next meeting.

As expected, the Fed said it is reducing, or “tapering,” its asset purchases by $10 billion a month to just $15 billion. So it is widely expected to announce one final taper when it meets again in October.

Investors and economists had been debating whether the Fed would keep the “reasonable time” language in its statement. If the Fed had dropped those two words, it could have been a signal from the central bank that it might look to hike interest rates in the spring of next year … earlier than expected.

The Fed has kept its key short-term rate near zero since December 2008. That rate influences how much interest consumers and businesses pay on many different types of loans.

The stock market dipped initially when the statement came out at 2pm ET, but then rebounded. The Dow is now higher than before the Fed announcement.

But an improving job market has put some pressure on the Fed to begin unwinding its stimulus efforts and consider raising rates to keep the economy in check.

To that end, the Fed released details about an exit strategy, a blueprint for how to raise rates and reduce the amount of bonds it is currently holding in its portfolio. And according to new interest rate targets from individual Fed members, the median forecast for where rates will be at the end of 2015 I s 1.375%.

Still, there are no significant signs of inflation yet. Consumer prices even fell in August. And it appears that the Fed may be a little less bullish on the economy’s prospects for the remainder of this year and next year.

The Fed released new economic projections Wednesday and cut its forecast for gross domestic product (GDP) growth slightly for 2014. The change to its 2015 outlook was more dramatic. The midpoint of its forecast is for 2.8% growth in GDP next year, down from 3.1% in June.

The central bank tightened the range of its forecasts for the unemployment rate and inflation for this year and next but the midpoints are roughly the same.

Fed chair Janet Yellen will give further guidance about the economy and interest rates when she speaks to reporters later Wednesday afternoon.

But the decision was not unanimous, an indication that there is disagreement amongst Fed officials about the direction of the economy. Two members of the Fed’s policy committee voted against the Fed’s actions.

Dallas Fed president Richard Fisher indicated that continued strength in the economy and “continued signs of financial market excess” — i.e a surging stock market — may make it necessary for the Fed to start raising rates sooner.

Philadelphia Fed president Charles Plosser objected to keeping the “considerable time” language because he thinks the Fed should not make any of its decisions dependent on the calendar.