The Federal Reserve took two steps toward winding down the historic easy-money policies that have defined its response to the financial crisis, but stopped short of the move markets are awaiting most: signaling when interest rates will start to rise.
With the economy gradually improving, U.S. central-bank officials plan to end the bond-buying program known as quantitative easing after October, hoping to finally stop expanding a six-year experiment in monetary policy that has left the Fed holding more than $4 trillion of Treasury and mortgage bonds.
Federal Reserve Chairwoman Janet Yellen discusses adjusting monetary policy and the Fed's plans for its balance sheet. Photo: Getty.
WSJ's Paul Vigna discusses Federal Reserve Chairwoman Janet Yellen's news conference with John Carney, Kathleen Madigan and Roger Bayston of Franklin Templeton. Photo: Getty.
The Fed on Wednesday also detailed a new technical plan for how it will raise short-term interest rates, something most officials currently don't intend to do until next year. The central bank has kept the federal-funds rate near zero since December 2008 and offered assurances along the way about rates remaining low, another part of its varied efforts to boost the post-financial-crisis economy.
These assurances, which remained in the Fed's policy statement even though some officials want to do away with them, showed the Fed's caution about steering away too soon from policies which it believes are supporting the economy. Rates will stay low for a "considerable time" after the bond-buying program ends, the Fed said, as the economy continues to face "significant underutilization of labor resources."
Some market participants expected the Fed to ditch the "considerable time" language, which could have been seen as a sign of a sharper shift toward raising rates.
Fed Chairwoman Janet Yellen, in a news conference following the two-day policy meeting that ended Wednesday, sought to give the central bank room to maneuver in the months ahead, as officials survey a mixed economic landscape marked by slow growth but falling unemployment. While the Fed expects to keep rates low for a "considerable time," she declined to say how much time that meant. And she repeatedly stressed the timing depends on how the economy performs.
"I want to emphasize that there is no mechanical interpretation of what the term 'considerable time' means," she said. "If the pace of progress in achieving our goals were to quicken, if it were to accelerate, it's likely that the [Fed] would begin raising its target for the federal funds rate sooner than is now anticipated…and the opposite is also true."
Markets responded modestly following the statement and Ms. Yellen's news conference. The Dow Jones Industrial Average rose 24.88 points, or 0.15%, to close at a record 17156.85. Bond prices fell, as yields on 10-year Treasury notes inched up 0.013 percentage point to 2.60%.
"The Fed is still looking for a critical mass of signals to start tightening and the 'considerable time' phrase has been downgraded to mean nothing at all," Steve Blitz, chief economist at ITG Investment Research Inc., said in a note to clients. "[Fed] policy is now running from data release to data release."
The Fed is navigating a confounding economic environment that could complicate the methodical plans Ms. Yellen has laid out for policy in the months ahead. Economic growth has consistently underperformed the central bank's expectations and officials reduced their growth forecasts through 2017. The Fed's updated projections, released quarterly, showed policy makers expect the economy to expand at a pace consistently below 3% for the next three years. During the 1990s, by contrast, a 3.4% growth pace was the norm.
"It's worrisome that the Fed again revised down its growth projections, also fueling concerns that America's economic potential is slipping," said Mohamed El-Erian, an adviser at Allianz and former chief executive of Pimco, the large bond-management firm.
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