US Fed offers no hint on rate rise as stimulus ends

The Federal Reserve Image copyright AFP
Image caption Many investors are watching the Fed for signs of when it may raise interest rates

The US Federal Reserve has reiterated that it will raise interest rates once a "considerable time" has passed after its stimulus programme ends in October.

The announcement came at the end of a two-day meeting of the central bank's policy committee in Washington DC.

In a press conference, Fed chairwoman Janet Yellen disappointed some when she said there was no "calendar date" for a rate rise.

US markets, however, were reassured, rising in the wake of her comments.

The Dow Jones closed at a record high.

Wednesday's announcement of the end of the stimulus programme, known as quantitative easing, was widely expected.

The Fed has been buying billions of dollars of bonds in an effort to keep long-term interest rates low and thus boost spending. However, as the US economy has picked up steam, the central bank has said that extra support is no longer necessary.

Now, investors are focused on when the Fed will raise its short-term interest rate, which has been at zero since late 2008.

No phrase change

Analysts, investors, and markets around the world are focusing on the central bank's phrasing that a "considerable time" will need to pass from the end of quantitative easing until it decides to raise rates.

The Fed first inserted the phrase "considerable time" into its statements in December 2012.

However, it was only when challenged in March about the meaning of the phrase that markets became spooked. Ms Yellen initially indicated "considerable time" meant roughly six months - a statement from which she has clearly backtracked.

"As I have said repeatedly, the decisions that the committee makes about what is the appropriate time to begin to raise its target for the federal funds rate will be data dependent," Ms Yellen said on Wednesday in response to questions.

"If the events surprise us and we are moving more quickly toward our objectives and the committee sees a need to move sooner, or later depending on what the data is... I do feel we have the flexibility to move," she added.

Image copyright Getty Images
Image caption Fed chair Janet Yellen reiterated that markets must accept a level of uncertainty about the Fed's policies

"It is important for markets to understand that there is uncertainty and the statement is not some sort of firm promise about a particular amount of time."

'Confusing and not consistent'

The Fed released an updated plan to "normalise" its policy in addition to its traditional statement.

"When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate," wrote the Fed, but noted that discussions about a rate rise were "part of prudent planning and do not imply that normalisation will necessarily begin soon".

That left many investors scratching their heads.

"The resulting message is confusing and not consistent," wrote Jefferies economists in a note to clients, adding that the normalisation plan was mostly summary and did not add new information.

Divided board

In a rare display of dissent, two members of the Fed's policy making committee departed publicly from the decision to keep the language surrounding interest rate rises the same.

Fed board members Richard Fisher and Charles Plosser indicated they thought "the continued strengthening of the real economy, improved outlook for labour utilisation and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation" than the Fed was currently indicating in its statement.

So-called "hawks" have warned that if the Fed keeps its stance too loose for too long, it could encourage reckless spending which in turn could lead to a faster-than-expected rise in prices.

However, the most recent data on inflation released on Wednesday by the US labour department showed a surprise drop in prices.

Prices fell 0.2% in August from July, their first decline in more than a year, and annual inflation is currently at 1.7% - well below the Fed's target.