The Federal Reserve remained on its easy-money course Wednesday, allaying market fears that it might start raising interest rates sooner than expected.
In a statement released following its two-day meeting, the U.S. central bank left largely intact key provisions, despite expectations in some quarters that it would indicate a tightening bias.
The Fed’s Open Market Committee did not remove language that said interest rates would rise “a considerable time” after the monthly bond-buying program ended. Market expectations are that quantitative easing will conclude in October, and excising the language could have sent a signal that a rate hike would come as soon as six months later.
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The Fed, however, changed the parameters for how it will make future rate calls.
Economic expectations from Fed officials changed little, with expectations cementing that rates will rise in 2015.
Despite the dovish bias, markets reacted negatively with stocks dropping. The U.S. dollar index was the biggest mover, gaining on belief that the Fed continued moves, albeit gradual, towards tighter policy.
After years of nearly complete clarity regarding policy, the Federal Reserve has had investors and economists scrambling of late to decipher whether just a few words would be removed or changed from Wednesday’s otherwise-lengthy statement.
Were those words—”a considerable time,” in particular—to go away, most market participants felt that would signal a hike in interest rates sooner than the market had expected. Should they have stayed, conversely, that would mean the U.S. central bank will stay on a path of near-zero short-term rates well into the future, and maybe even beyond current market expectations.
Consequently, Fed Chair Janet Yellen has fashioned quite a tightrope to walk when she delivers an afternoon news conference.
There was one additional dissenter for the September statement. Philadelphia Fed President Charles Plosser voted against the position in July, and he was joined this month by Dallas Fed President Richard Fisher.
“President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance,” the statement said.
The Fed’s new policy guidance regime provided a more nebulous backdrop for how the central bank’s leaders will proceed.
“When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate,” the statement said.
In reducing accommodation, the Fed will adjust the rate it pays on excess reserve balances, and will use overnight reverse repurchases on its $4.5 trillion portfolio. It also said it would reduce its balance sheet “in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal and securities” it holds.