Fed Opens Door Wider for Rate Hike but Downgrades Outlook

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Janet Yellen Delivers Semi-Annual Testimony To Senate Banking Committee
Andrew Harrer/Bloomberg via Getty Images Federal Reserve Chair Janet Yellen speaks during a Senate Banking Committee hearing last month in Washington.
By Michael Flaherty and Howard Schneider

WASHINGTON -- The Federal Reserve on Wednesday moved a step closer to hiking rates for the first time since 2006, but downgraded its economic growth and inflation projections, signaling it is in no rush to push borrowing costs to more normal levels.

The U.S. central bank removed a reference to being "patient" on rates from its policy statement, opening the door wider for a hike in the next couple of months while sounding a cautious note on the health of the economic recovery.

Fed officials also slashed their median estimate for the federal funds rate -- the key overnight lending rate -- to 0.625 percent for the end of 2015 from the 1.125 percent estimate in December.

%VIRTUAL-pullquote-Just because we removed the word 'patient' from the statement doesn't mean we're going to be impatient.%The cut to the so-called "dot plot," together with other economic concerns cited by the Fed, sent a more dovish message than investors were expecting, and pushed market bets on the central bank's rate "lift-off" from mid-year to the fall.

"Just because we removed the word 'patient' from the statement doesn't mean we're going to be impatient," Fed Chair Janet Yellen said in a press conference after Wednesday's statement.

Stocks on Wall Street surged and oil prices jumped as much as 5 percent after the Fed statement. The dollar tumbled against other major currencies and the U.S. 10-year Treasury yield dipped below 2 percent for the first time since March 2.

In its quarterly summary of economic projections, the Fed cut its inflation outlook for 2015 and reduced expected U.S. economic growth. The policy statement repeated its concern that inflation measures were running below expectations, weighed down in part by falling energy prices.

Fall Rate Hike?

"I just don't see any price or wage pressure out there," said Craig Dismuke, chief economist for Vining Sparks. "June is not off the table but it's unlikely. September is the most likely time for the first rate hike. They might get one hike in this year, maybe two."

The Fed noted that a rate increase remained "unlikely" at its April meeting and said its change in rate guidance didn't mean it has decided on the timing for a rate hike. Yellen told reporters that a June move could not be ruled out.

The Fed statement, however, allowed enough flexibility for the central bank to move later in the year, stressing that any decision would depend on incoming data.

"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium-term," the Fed said.

It had previously said it would be patient in considering when to bring monetary policy back to normal.

Goldman Sachs economist Jan Hatzius said in a research note that the Fed's statement and projections suggested a hike in September rather than June, citing the "dot plot" shift and changes to the central bank's assessment of the economy.

Muddy Data

Yellen has kept rates at near zero since taking over as head of the central bank in February, 2014, though she has also overseen a steady whittling of loose money promises.

And while she lays the ground for "lift-off," the Fed continues to grapple with muddy economic data: strong job creation, continued growth, and healthy consumer demand in the United States, but a global collapse in oil prices and a rapid run-up in the dollar that could mean the Fed remains far from its 2 percent inflation target.

The Fed on Wednesday downgraded its view of economic activity, saying growth has "moderated somewhat," a departure from its view in December, when it cited economic activity expanding at a solid pace.

Economists and investors were watching closely for the Fed to drop "patient" from its rate guidance language, as a sign that the central bank will shift toward making rate decisions on a meeting-by-meeting basis.

"Let me emphasize again, that today's modification of the forward guidance should not be read as indicating that the committee has decided on the timing of the initial increase in the target range for the federal funds rate," Yellen said in the press conference.

"In particular, this change does not mean that an increase will necessarily occur in June. Although we can't rule that out."

The federal funds rate has been at its low point since December of 2008. The last time the Fed raised rates was in June 2006, when a roaring housing market and strong economic growth prompted it to push its target rate to 5.25 percent.

There were no dissents on the Fed statement.

-With additional reporting by Richard Leong in New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Fed Opens Door Wider for Rate Hike but Downgrades Outlook
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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