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Federal Reserve Drops “Patient” Pledge in March Interest Rate Statement

The Federal Open Market Committee made no changes to its benchmark lending rate on Wednesday, but dropped the word “patient” from its official rate statement, fueling expectations for a midyear rate hike.

As expected, the Federal Reserve held its target for the overnight rate at 0 percent to 0.25 percent, unchanged since December 2008. The minutes of this month’s policy meetings will be released on April 8.

“Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat,” read the official rate statement on Wednesday. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish.”

The statement made no mention of remaining patient in deciding when to begin raising interest rates. The Fed had previously said it was prepared to keep interest rates at record lows for longer than previously expected to account for global uncertainties and very weak inflation. Fed Chair Janet Yellen struck a dovish tone last month when she told the Senate Banking Committee there would be no interest rate adjustment in the “next couple of FOMC meetings.”

However, the FOMC is under growing pressure to normalize monetary policy in order to manage expectations and facilitate a gradual rate hike timetable. Over the past several weeks the financial markets had priced in a midyear rate hike, helping to push up the US dollar to new 12-year highs. The dollar’s strength is due in large part to diverging monetary policies between the US and its trade allies. About a dozen central banks have eased monetary policy this year to counteract weak inflation. The protracted decline in oil prices is expected to keep inflation low for a while longer, with the latest indicators showing a further drop in energy prices over the horizon.

In total, 15 of 17 officials said 2015 was the appropriate timing of policy firming, with only two officials indicating 2016.

The Fed  downgraded its forecast for real GDP growth this year to 2.3 percent to 2.7 percent. It had projected a growth rate of between 2.6 percent and 3 percent in December. It also lowered its growth projections for 2016 and 2017. However, the central bank’s outlook on employment improved, with officials now forecast an unemployment rate of 5 percent to 5.2 percent this year, down from 5.2 percent to 5.3 percent in its previous forecast.

The outlook PCE inflation worsened this year to 0.6 percent to 0.8 percent, compared to the previous forecastof 1 percent to 1.6 percent. Inflation is expected to return to target in the next two years.

Officials also lowered their median forecast for the federal funds rate at the end of 2015 to 0.625 percent from 1.125 percent in December, suggesting the path toward rate normalization would be slow and steady.

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