Fed keeps key rate near zero, will stay 'patient' on raising it

Despite a more upbeat assessment of the U.S. economy, Fed says it will be 'patient' on raising rates

Federal Reserve policymakers kept their benchmark interest rate near zero and reiterated a plan to be patient about future hikes, even though they issued a more upbeat assessment of the U.S. economy.

Fed officials said in a policy statement Wednesday that the economy is expanding at a “solid pace,” a rosier view than the “moderate pace” they saw last month. They indicated that no rate increase is coming until at least June.

Recent job gains have been “strong” and falling energy prices “have boosted household purchasing power,” the Fed said in its statement, issued after its regular two-day meeting.

Fed policymakers continue to view the sharp decline in oil prices as temporary, but said the drop has had a greater effect on inflation than was thought last month.

Largely because of declining energy costs, inflation now has “declined further below” the Fed's 2% annual target, the statement said. The latest government data tracked by the central bank showed inflation was 1.2% for the 12 months that ended in November.

The statement, which was approved unanimously by the 10 voting members of the Federal Open Market Committee, was in line with analyst expectations.

The Fed gave no indication an interest rate hike would take place before the middle of the year, which is what experts have forecast.

“They’re going to wait and they’re going to be patient,” said John Silvia, chief economist at Wells Fargo & Co.

He's still expecting a rate hike in June, but said Wednesday's statement lowered the probability.

“We’d have to see some turnaround in inflation numbers, and I don’t think we’re going to see it that quick,” Silvia said.

Fed policymakers are trying to decide when to start raising the central bank's benchmark short-term interest rate as the U.S. recovery strengthens. But the calculation is complicated by plunging oil prices, which have pushed inflation lower, and slow growth abroad.

In a nod to the sluggish world economy, Fed officials said that “readings on ... international developments” would be one of the factors they considered in deciding when to raise rates. The language was not in the December statement.

The Fed had said for months that it expected to wait a “considerable time” after ending its bond-buying stimulus program before lifting rates. The program ended in October.

In their December statement, officials changed the wording to say they would be “patient” in starting to normalize monetary policy. That wording had been used in 2004 as the Fed prepared to raise rates after a prolonged period of holding them low.

Fed Chairwoman Janet L. Yellen has said patience means a rate hike is unlikely for at least the next two meetings, an indication that the committee won’t likely start to raise rates until its June meeting.

Though analysts have expected a rate hike by mid-year, a CNBC survey this week found that experts now anticipate the first increase to come in September.

The Fed's last rate hike was in June 2006. Policymakers began lowering the key rate in September 2007 as the economy worsened, and they have kept it near zero since late 2008 near the depth of the Great Recession.

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Copyright © 2016, Los Angeles Times

Update

12:10 p.m.: This post has been updated with reaction and analysis.

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