Patient Fed Softened Views on Rate Hike Schedule, Stocks Soar

Devan Biswas
17 Dec, 2014
New York City

Federal Reserve at the end of its two-day meeting lowered its assessment of jobless rate and inflation next year and softened its tone towards the rate hike in 2015.

Federal Reserve at the end of its two-day meeting lowered its assessment of jobless rate and inflation next year and softened its tone towards the rate hike schedule in 2015.

Fed statement softened the language related to the rate and also indicated that the committee “can be patient” in “beginning to normalize the stance of monetary policy.”

Fed kept the target for fed fund rates between zero and 0.25% and added “for a considerable time” and hedged “especially if projected inflation continues to run below the 2% longer-run goal.”

The Fed statement was widely perceived by investors as positive and market indexes immediately accelerated the gains of the day.

The softer tone was a signal to financial markets that the central bank is not ready to increase rate and it would be quite some time before the Fed sets time frame for the increase.

Prior to the meeting, investors were surmising the rate to begin as early as June of next year, but after the statement economists were of the view that the rate may not begin to rise till the third quarter or later in 2015.

S&P 500 and Nasdaq Composite indexes soared 1.8% from the 1% increase just before the announcement in the afternoon.

Fed policy makers entered the meeting with the backdrop of volatile global markets and plunging oil prices and widening currency crisis in Russia.

However, policy makers largely ignored the global markets and Russia developments and focused on the benefits of lower oil prices to the economy.

Several policy makers in the recent months have expressed that the impact of lower oil is largely going to be transitory on inflation but will underpin economic growth.

In an accompanying statement, the Federal Open Market Committee lowered its economic projections.

The jobless rates estimate for 2015 was lowered to 5.2% from the previous range of 5.4% to 5.6% estimated in September.

The Fed committee also lowered its range, for headline personal consumption expenditures, its preferred measure of inflation, between 1.0% and 1.6% from 1.6% to 1.9%.

It is widely believed in the international circles that the Fed measures understate the inflation faced by many in the U.S.

A family of four generally faces higher inflation than reported by the central bank because the Fed undercounts the rising cost of education and medical expenses.