The Fed's latest statement, as expected, dropped the phrase that said the central bank would be "patient" before raising its benchmark rate. Nervous investors around the globe had focused on the removal of the word because the change was seen as opening the door to a rate increase very soon.
But the statement, issued Wednesday after a two-day meeting, ruled out a move at the Fed's next meeting in April. And significantly, Fed officials lowered their estimates for how high the rate would go this year, suggesting an initial rate hike later in September or a slow pace of subsequent increases. A majority of policymakers projected the Fed's main short-term rate to remain at less than 1% at year-end.
The Fed has kept its so-called federal funds rate near zero since December 2008 to boost the economy. A rate hike would have a broad influence on interest rates, raising the borrowing costs for businesses as well as for consumers who have credit cards and mortgages. But it also would give savers a better return on their deposits.
With the "patient" term excised, Fed officials have the flexibility to consider the merits of a rate increase on a meeting-by-meeting basis. Just when the Fed might pull the trigger will depend on economic data, notably on employment and inflation.
U.S. stocks, which had been slumping earlier Wednesday, shot up immediately after the statement's release. The blue-chip Dow Jones industrial average was up 227 points, or nearly 1.3%, and the broader Standard & Poor's 500 rose 1.2%.
Ten-year bond yields, a benchmark for mortgages, fell sharply to below 2%. The dollar tumbled against the euro.
"This could prove to be a watershed moment," said Carl Tannenbaum, senior vice president at Northern Trust Co. in Chicago. "Everybody was expecting removal of 'patient' would start the clock to a tightening in June," he said. "Even though the language changed, I don't think the clock is ticking as quickly." If anything, Tannenbaum added, the Fed seemed to be even more patient than it was before the meeting.
The Fed gave reasons to be cautious. Its statement said economic growth had "moderated somewhat" since its last policy meeting in January. In fact, economic output in the first quarter appears to be running at only about half the pace as the 33/4% annualized growth rate in the second half of last year.
Although the snowy weather and work stoppages in the West Coast may be factors, the Fed noted that the housing market remains sluggish and, more recently, U.S. exports have softened. Yellen said it was likely that the strong dollar, which makes American-made goods pricier in foreign markets, had begun to pinch exports.
The dollar had jumped in recent months because of America's relatively strong economy and the prospect of Fed rate hikes in the U.S. while central banks in Europe, Japan and some other economies are continuing with monetary stimulus to hold down rates.
The U.S. economy also has seen weaker consumer spending than expected. Falling energy prices were supposed to add some zest to consumers, who are also benefiting from an acceleration of job growth and super-low interest rates that have reduced their debt-service burden to the lowest in years. Households may yet open their wallets, but they have been puzzlingly closed so far this year.
Consistent with this picture, Fed officials lowered their projections for economic growth in their latest quarterly forecast released Wednesday. They now expect gross domestic product, the value of all goods and services produced, to expand 2.3% to 2.7% this year, down from growth of 2.6% to 3% in their December projections. GDP growth outlook for next year also was marked down compared with the forecast at the end of last year.
Despite the uncertainties and the Fed's repeatedly overly optimistic economic projections in recent years, the labor market recovery has exceeded expectations, and overall, Yellen remained upbeat about the economy: "We do see considerable underlying strength in the U.S. economy, and in spite of what looks like a weaker first quarter, we are projecting good performance for the economy," she said.
Inflation, however, remains well below the central bank's target, thanks largely to falling energy prices, the Fed said. Yellen noted that the strong dollar has contributed to declining inflation as it has added downward pressure on prices of imported goods.
Unusually low inflation presents risk of deflation — a potentially crippling condition of falling prices that hamper spending and investments — and Yellen wants to feel confident before raising rates that inflation will gradually rise toward the Fed's target over the medium term.
The dollar, which has appreciated about 30% against the euro in the last year, fell after the Fed's statement, but currency traders see the greenback appreciating further in the foreseeable future as the Fed shifts toward tightening monetary policy while other central bankers keep pumping new money into their financial system.
"We think the dollar will continue to strengthen with divergence" in central banks' policies, said Jeff Greenberg, a senior economist at J.P. Morgan Private Bank in New York. "But episodes like today's [Fed] meeting point out that the divergence will be gradual," he said.