The Fed dropped its “patient” pledge in a statement released today following two days of committee meetings. Despite removing the “patient” policy, the Federal Open Market Committee remained steady on the belief that interest rates will not increase by their April meeting. Fed Chair Janet Yellen emphasized in a press conference following the meeting, the removal of the pledge doesn’t mean Fed rates will increase by June.
“Today’s modification of the forward guidance should not be read as indicating that the Committee has decided on the timing of the initial increase in the target range for the Federal funds rate,” she said. “In particular, this change does not mean that an increase will necessarily occur in June, although we can’t rule that out.”
Experts predicted the Fed would drop the patient language after this meeting, which many thought to be a sign rates could be increased by as early as June. The Fed however made it clear that a change in language does not mean they are ready for the hike. The Fed’s forecasts today contained a shallower path for interest rates going forward. Instead of increasing rates at 0.25 percent at every meeting, the median interest rate estimate from the Fed calls for only 7 increases over the course of the next 14 meetings. While low unemployment and strong job growth indicate the economy is improving, a decline in inflation remains one of the major reasons why the Fed believes the market is still not ready for the increase.
“The Committee currently anticipates that, 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,” the Fed statement said.
The committee said it would take a balanced approach whenever it decides to the remove the current policy, emphasizing long term goals and 2 percent inflation must be met before the decision. In order to maintain accommodative financial conditions, the Fed said it will continue the policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Currently, only two of the 17 Fed officials think the increase will not happen this year.
The Fed failed to provide any clear cut answer on any plan of action regarding policy. Yellen said the Fed could not provide certainty on their plans because data can’t be predicted and the economy will continue to evolve. “We can’t provide certainty and shouldn’t provide certainty because economic developments are uncertain,” she said. According to Yellen, the Fed forecasts are designed to be forward-looking, and that’s why most officials expect to tighten policy “sometime this year,”
“We don’t want to be premature in tightening policy and aborting a recovery that we have worked long and hard to proceed as far as it has, we also don’t want to be behind the curve and beginning to tighten given those lags,” Yellen said.