Business

Federal Reserve modifies stance on low interest rates

Federal Reserve Image copyright Getty Images
Image caption Most observers do not believe the Fed will increase interest rates until this summer at the earliest

The US Federal Reserve has modified its stance on interest rates, which have been kept at a record low of 0% since the financial crisis in 2008.

It removed the word "patience" from its regular statement. The language was seen as an indication that the central bank would refrain from raising rates for at least a few months.

But the Fed said it would wait until it saw "further improvement" in the US labour market before raising rates.

US shares rose sharply on the news.

A delayed rate rise is good news for US companies, who will remain able to borrow cheaply for some time yet.

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That cheered investors, who pushed the Dow Jones higher by 0.9% or 159 points to 18,008, while the broader S&P 500 rose 1% to 2,096.

Many market watchers had expected the Fed to signal on Wednesday that it would move towards a rate rise in June or September.

Not impatient

However, in a statement released at the end of its two-day policy meeting in Washington, DC, the Federal Reserve warned that US economic growth had "moderated somewhat" since January.

Fed officials added that it would "appropriate" to raise interest rates once there had been "further improvement in the labor market" and cautioned that "this change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase".

The chair of the Federal Reserve, Janet Yellen, said in a press conference following the release of the statement that the Federal Open Market Committee (FOMC) did "not want to rule out the possibility" of a rate rise, but any move would "depend on the committee's assessment if incoming information".

"Just because we removed the word patient from the statement doesn't mean we're going to be impatient," she added.

Liftoff suspended

A recent spate of disappointing US economic data, such as lower retail sales and consumer sentiment, has led some economist to call for a rate rise to be delayed even further.

"The Fed is in no rush," said Ward McCarthy, chief US economist at Jefferies.

"At the current juncture, the timing of the liftoff is still indeterminate and will depend upon the inflation data. The policy statement eliminated the use of 'patient' in forward guidance, but the FOMC also described the new forward guidance as being "consistent" with the prior forward guidance."

He added: "The word 'patient' was removed, but the meaning of patient remained."

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Media captionWhen will the Fed raise rates?

Analysis: Michelle Fleury, New York business correspondent

For investors this was billed as the biggest Federal Reserve policy meeting in years.

The Fed under the leadership of Janet Yellen is trying to prepare the world for the first US rate hike in nearly a decade.

By dropping the word patient from its statement, America's central bank signalled its intention to start gradually raising interest rates from their record lows.

The world's largest economy is improving. Jobs are returning. But the recovery in the housing market is subdued. Exports have slowed as the value of the dollar has climbed. And wages remain stagnant.

Ultra low rates are meant to encourage borrowing and spending to fuel growth. The Fed is now seeing that the recovery is looking strong enough to be able to support higher rates.

But the exact timing...well that remains a mystery.

The only certainty is that those higher rates won't come in April.

As for any more clues?

Ms Yellen refused to provide any hints during her press conference: "We can't provide certainty and shouldn't provide certainty because economic developments that will unfold are uncertain," she said.

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