Interest rates will stay put -- for now -- to boost the
still-recovering economy, but are likely to rise next year, the
Federal Reserve signaled after its first policy meeting under new
leader Janet Yellen.
As expected, the rate-setting Federal Open Market Committee
voted to keep its target federal funds rate -- the lever that
controls variable rate credit card APRs and other short-term
lending rates-- at its current level between 0 percent and
In remarks about the economy, the committee seemed to take a
less optimistic view than it did after its
last meeting, in January
. Since then, "economic activity slowed during the winter months,"
the committee said in a
at the conclusion of its two-day meeting March 19, "in part
reflecting adverse weather conditions."
The vote maintains the aggressive stimulus policy the Fed began
under ex-chair Benjamin Bernanke, whose term ended in January.
Yellen, former vice chair at the Fed, has expressed views
about the economy and interest rate policy that fit closely with
Yellen "has made it clear she agrees with the policy regime
under Ben Bernanke, and intends to stay on that course," said
Richard Moody, chief economist at Regions Bank.
also reinforced expectations that the exceptionally low interest
rates put in place under Bernanke's leadership at the end of 2008
will begin to rise toward more normal levels during 2015. In
projections released with the announcement, a majority of the
committee said that the rate target should rise in 2015, and should
gain a full percentage point or more by the end of 2016.
"Unemployment and underemployment remain significant concerns,"
Yellen said in a press conference after the meeting. "By any
measure, there remains substantial slack in the labor market."
The FOMC continued to pare back, or taper, its purchases of
longer-term bonds. The program of purchasing mortgage-backed bonds
and Treasury securities supports low long-term rates, particularly
for home mortgages. Starting in April, the Fed will buy $55 billion
of the longer-term bonds per month, down $10 billion from the
previous level. The move marks the third cut in purchases since the
started the taper in December 2013
Unemployment rate droppped
The committee made one significant shift: It dropped a specific
unemployment rate as a measuring stick it will use in deciding
future rate changes. The FOMC said in previous statements that
near-zero rates will remain "at least as long as the unemployment
rate remains above 6.5 percent," and longer-term inflation rates
are below 2.5 percent. The March statement deleted the reference to
the unemployment threshold, shifting the focus to inflation, which
remains well below the stated target.
The unemployment rate, at 6.7 percent in February, is hovering
close to the 6.5 percent mark. But the rate, although down
significantly from its recessionary peak of 10 percent in 2009,
masks weakness within the labor market, many economists argue.
Many working-age people have left the work force, helping
keep the jobless rate down but signaling that work remains scarce.
In addition, the number of hours worked fell in February,
undercutting the economic lift from job creation.
"There is this debate going on," Moody said. Many economists
"are under the opinion that the unemployment rate is not a good
measure of the true degree of labor-market slack."
Yellen said that dropping the specific jobless number made sense
as the threshold approached. The committee will continue to look at
the unemployment rate in determining when to hike rates, and at
other labor market measures such as part-time workers, long-term
unemployment and how often people quit their jobs.
"I take a high quit rate as a sign of a healthy economy," she
said. "When workers are scared, they show a reduced willingness to
quit their jobs."
Measures of economic health have been mixed since the
FOMC's last meeting. February's unemployment rate increased
slightly, although job creation was stronger than most analysts had
expected. And the total number of hours worked fell, but the
cause may have been unusually harsh weather that canceled
Taking account of one-time hits from the weather, "the
better-than-expected gain in jobs is as good a signal as any that
the economy is maintaining its resilience," TD Economics Senior
Economist James Marple said in a research note.
The Fed's hopes for a healthier labor market increased, despite
the less optimistic language about the winter slowdown in economic
activity. The majority of committee members predicted the jobless
rate will be between 6.1 percent and 6.3 percent at year end,
compared to a predicted range of 6.3 percent to 6.6 percent at the
What an interest rate increase will cost