The Federal Reserve on Wednesday gave itself room to keep borrowing costs low at least until next year by dropping a link between the benchmark interest rate and a specific level of unemployment.
“We know we’re not close to full employment, not close to an employment level consistent with our mandate, and unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate target,” Chairwoman Janet Yellen said after her first time leading a meeting of the Federal Open Market Committee.
In deciding how long to keep rates low, the committee will look at a “wide range of information,” including labor market conditions, inflation expectations and financial markets, Yellen said. The Fed also reduced the monthly pace of bond purchases by another $10 billion, to $55 billion.
Treasury yields climbed while stocks fell for the first time in three days as Yellen said the central bank’s stimulus program could end this fall and benchmark interest rates could rise six months later.
The FOMC statement repeated that the federal funds rate will stay low for a “considerable time” after asset purchases end. Asked in the press conference to specify how long that might be, Yellen said: “You know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing.”
The Fed is overhauling forward guidance after unemployment declined toward 6.5 percent, its previous threshold for a rate increase, faster than policy makers predicted. The jobless rate was 6.7 percent last month. Yellen told lawmakers in February that the unemployment rate alone isn’t an adequate gauge of economic health and “there’s a great deal of slack in the labor markets still that we need to work to eliminate.”
Quarterly forecasts by Fed policy makers also showed more officials predicting the benchmark rate, now close to zero, would rise at least to 1 percent at the end of 2015 and 2.25 percent by the end of 2016.
Yellen downplayed the importance of the forecasts.
“These dots are going to move up and down over time,” she said in a reference to the forecasts, which are illustrated as dots on a chart. They moved up “ever so slightly,” she added. “The committee’s views on policy will likely evolve.”
The FOMC repeated that it will reduce asset purchases “in further measured steps at future meetings.” At the same time, “asset purchases are not on a preset course.”