Business

US Federal Reserve hints at interest rate rise in 2015

  • 20 March 2014
  • From the section Business
Exterior of US federal reserve Image copyright Getty Images
Image caption The Fed has been buying bonds to keep interest rates low and boost growth

The US Federal Reserve Chair Janet Yellen has hinted that interest rates in the US could start to rise in early 2015.

Ms Yellen said the Fed could begin raising rates six months after it halts its monthly bond-buying programme.

She made the remarks after the Fed said it will scale back bond purchases by a further $10bn (£6bn) per month.

This is the third time in a row that the central bank has tightened its stimulus efforts.

The latest reduction brings the Fed's monthly bond-buying down to $55bn from $85bn last year.

"This is the kind of term it's hard to define," Ms Yellen said at a press conference. "Probably means something on the order of six months, or that type of thing."

If bond purchases end - as expected - later this year, this would imply rate increases around April 2015.

Broader indicators

The Fed lowered its overnight interest rate to 0% in December 2008 as part of the steps it took to trigger growth in the economy amid the global financial crisis.

That crisis hurt the US economic growth and resulted in high levels of unemployment.

Along with lowering the interest rates, the central bank also started buying bonds in an attempt to keep long-term borrowing costs low.

The idea was to encourage businesses to borrow and spend more, to try and spur growth in the economy and create more jobs.

The stimulus efforts appear to have had an impact, with the US economy showing signs of recovery of late.

That has seen the central bank scale back its key stimulus measure - the bond-buying programme also known as quantitative easing - for three months in a row.

However in its latest policy decision, the Fed said it would look at multiple factors before approving any rise in interest rates.

It had previously hinted at doing so once the jobless rate fell to 6.5%.

"This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments," it said.

Nervous markets?

US stock markets fell on the news.

Some analysts are saying the change in the Fed's guidance led to worries that interest rates may rise sooner than expected.

"The Fed moved the goal post again," said David Molar, managing director at Hightower.

"It goes from a 6.5% unemployment threshold to a qualitative approach which is nebulous for the market.

"No one knows what will trigger further tapering, a pause in tapering or an increase in asset purchase. It's a major change in policy."

Mark Grant, managing director at Southwest Securities added: "What seems to be troubling the market is that even though it reiterated that it wouldn't be raising rates this year, people were put on notice that a hike is coming."

"We'll likely see some rise in short rates as a result of this, if not out across the whole curve."