Fed Keeps ‘Considerable Time’ Pledge as Growth ‘Moderate’

U.S. Fed Chair Janet Yellen
Janet Yellen, chair of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

The Federal Reserve stuck to its pledge to keep interest rates near zero for a “considerable time” after it stops buying assets, even as it outlined a strategy to exit from six years of unprecedented easing.

“The labor market has yet to fully recover,” Fed Chair Janet Yellen said at a press conference today after a meeting of the Federal Open Market Committee in Washington. “There are still too many people who want jobs but can’t find them.”

Yellen added that “inflation has been running below the committee’s 2 percent objective,” a contrast to the panel’s July statement that it was “somewhat closer” to its goal.

Treasuries declined and stocks gave up early gains as investors focused on an increase in Fed officials’ interest-rate projections for next year. Officials raised their median estimate for the benchmark federal funds rate, expressed as dots on a chart, to 1.375 percent at the end of 2015, compared with a June forecast of 1.125 percent.

“Yellen wants to leave the impression there’s no rush to hike, but at the same time if you look at the 2015 dots they’re above what they were before and that implies some normalization next year,” Thomas Costerg, an economist at Standard Chartered Plc in New York.

The Standard & Poor’s 500 Index was up 0.1 percent to 2,001.57 at the 4 p.m. close of trading in New York after rising as much as 0.6 percent. The yield on the 10-year Treasury note rose three basis points to 2.62 percent.

Policy makers tapered monthly bond buying to $15 billion in their seventh consecutive $10 billion cut, staying on course to end the program in October. Yellen, at the press conference, declined to specify how quickly rates might rise after purchases end.

Data Dependent

“There is no mechanical interpretation” of the “considerable time” phrase, she said. “The decisions that the committee makes about what is the appropriate time to begin to raise its target for the federal funds rate will be data-dependent.”

Yellen and her Fed colleagues are debating how much longer to keep interest rates near zero as they get closer to their goals for full employment and stable prices. Some officials have said dropping the “considerable time” pledge would give the Fed more flexibility to react to the latest economic data.

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser both dissented from today’s statement.

Yellen also updated plans for the “normalization” of monetary policy following the Fed’s unprecedented actions to battle the worst recession since the Great Depression.

Gradual, Predictable

She said the Fed will first raise its benchmark federal funds rate, or the cost of overnight loans between banks. It would then cease reinvesting maturing debt from its balance sheet, reducing asset holdings in a “gradual and predictable manner.”

Yellen said policy makers are in no hurry to shrink a balance sheet that has ballooned to $4.42 trillion after several rounds of asset purchases intended to hold down long-term interest rates. She said it could take to the “end of the decade” to shrink the Fed’s holdings “to the lowest levels consistent with the efficient and effective implementation of policy.”

Yellen emphasized that interest rates are unlikely to rise quickly as the economy continues to overcome the damage wrought by the recession.

“Even after employment and inflation are near mandate-consistent levels, economic conditions may for some time warrant keeping the target federal funds rate below levels the committee views as normal in the longer run,” she said.

Main Rate

The Fed has said since March that its benchmark rate would stay low for a “considerable time” after it completes monthly bond buying intended to boost growth. With purchases coming to an end, officials started debating how much longer to keep the guidance.

Yellen today emphasized the need to retain flexibility.

“If the economy proves to be stronger than anticipated by the committee, resulting in a more rapid convergence of employment and inflation to the FOMC’s objectives, then increases in the federal funds rate are likely to occur sooner and to be more rapid than currently envisaged,” she said.

On the other hand, “if economic performance disappoints, increases in the federal funds rate are likely to take place later and to be more gradual.”

Job Gains

Labor-market gains have heartened Fed officials who argue for an earlier rate increase.

Unemployment in August fell to 6.1 percent, matching the lowest level since September 2008. While monthly payroll growth slowed to 142,000 in August, this year’s average gain of 215,000 puts the U.S. on pace to add 2.58 million jobs for the biggest annual growth in 15 years.

Yellen said the labor market has yet to fully heal.

At 6.1 percent, unemployment “remains significantly above the level that most FOMC participants would regard as consistent with normal in the longer run, 5.2 percent to 5.5 percent,” she said today.

Inflation has remained contained even as growth picks up, giving the Fed room to continue unprecedented accommodation. A report today from the Labor Department showed that the consumer price index unexpectedly dropped in August for the first time in more than a year.

Adding to the Fed’s caution is concern that any move to signal an increase in interest rates risks sparking a market backlash that could endanger the five-year-old expansion.

Easy monetary policy and rising corporate profits lifted the S&P 500 to 33 record closes this year. The benchmark has almost tripled from a 12-year low in March 2009 and is up 8.3 percent this year.