Federal Reserve brings end to era of historically low interest rates

Washington (Mar 18)  The US Federal Reserve called time on an era of historically low interest rates on Wednesday.

In its latest statement on the health of the US economy the central bank moved away from a pledge to be “ patient  ” before deciding to raise interest rates. Economists expect that interest rates could now rise by the end of the summer, the first rise in more than six years.

Stock markets, which had fallen ahead of the release, rose on the news as the Fed continued to signal a cautious approach to raising rates. “Just because we have removed the word patient from the statement does not mean we are going to be impatient,” Janet Yellen  , chair of the Federal Reserve, said at a press conference.

The Fed said rates would not rise before “further improvement in the labor market” and only when it was confident inflation was moving back to its 2% objective over the medium term.

“The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run,” the Fed said in its  statement. 

The Fed cut its benchmark short-term interest rate to zero on  16 December 2008  and it has remained close to zero ever since. The rock bottom rate policy was part of a massive stimulus programme aimed at revitalising the economy in the wake of the worst recession since the Great Depression.

The Fed’s decision comes after months of impressive growth in the jobs market. Last month US unemployment rate  fell to 5.5%  , down from a peak of 10% in  October 2009  . Last year was the best year for job growth since the late 1990s.

Ahead of the decision  Christine Lagarde  , managing director of the  International Monetary Fund  , warned that markets could suffer a “temper tantrum” after the decision, as they did when the Fed announced it would ease off its massive bond buying programme, known as quantitative easing, in 2013.

But the Fed’s still cautious approach appeared to have paid off. “What’s important about this part of the statement is that it clearly says the FOMC is looking for ‘further’ improvement, meaning the economy and labour market has not yet met whatever criteria necessary to warrant a rate hike. We remain of the belief the Fed will first raise rates in September and view this statement, and the projection changes, and reducing the odds of a June hike,” Dan Greenhaus  , chief strategist at broker  BTIG  , wrote in a note to investors.

Source: TheGuardian