WASHINGTON — Janet Yellen tried at her first news conference as Federal Reserve chair to clarify a question that’s consumed investors: When will the Fed start raising short-term interest rates from record lows?
Yellen stressed that with the job market still weak, the Fed intends to keep short-term rates near zero for a “considerable” time and would raise them only gradually. And she said the Fed wouldn’t be dictated solely by the unemployment rate, which she feels no longer fully captures the job market’s health.
Those two points reinforced a message the Fed delivered in a policy statement after ending a two-day meeting Wednesday. The statement also said the Fed will cut its monthly long-term bond purchases by $10 billion to $55 billion because it thinks the economy is steadily healing.
But Yellen might have confused investors when she tried to clarify the Fed’s timetable for raising short-term rates. She suggested that the Fed could start six months after it halts its monthly bond purchases, which most economists expect by year’s end. That would mean short-term rates could rise by mid-2015.
A short-term rate increase would elevate borrowing costs and could hurt stock prices. Stocks fell after Yellen’s mention of six months. The Dow Jones industrial average ended the day down more than 100 points.
The Fed’s latest statement said its benchmark short-term rate could stay at a record low “for a considerable time” after its monthly bond purchases end. The Fed has been gradually paring its bond purchases, which have been intended to keep long-term loan rates low.
“This is the kind of term it’s hard to define,” Yellen said of “considerable time.”
“Probably means something on the order of six months, or that type of thing.”
Though stocks sold off after that remark, the Fed’s statement and Yellen’s comments made clear that borrowing rates for consumers and businesses could remain low for many more months. Yellen also stressed that rate increases, once they occur, would occur only incrementally.
Some analysts said they thought Yellen’s reference to six months didn’t really change expectations for the timing of the Fed’s first rate increase.
“We’re not sure the comments suggest rates would begin to rise any earlier than the mid-2015 date already priced into rate futures markets,” Paul Ashworth, chief U.S. economist at Capital Economics, said in a note to clients.
In fact, Yellen devoted much of her news conference to explaining why the economy still needed a boost from the Fed. She stressed that low inflation and meager pay raises for many workers reflected a weaker recovery than the decline in the unemployment rate might indicate.
The Fed’s benchmark short-term rate has been at a record low, near zero since 2008. The Fed has previously resisted specifying the timing of a possible increase in the short-term rate.
One reason for dropping a threshold unemployment rate, as Yellen among others have noted, is that the rate can overstate the job market’s health. In recent months, for example, the unemployment rate has fallen not so much because of robust hiring but because many people without a job have stopped looking for one.
The Fed’s previous statement had said it planned to keep short-term rates at record lows “well past” the time unemployment fell below 6.5 percent. The rate is now 6.7 percent.
The Fed’s decision to drop the 6.5 percent threshold “represents the difficulty in finding the perfect economic indicator for explaining something as complex as the state of the labor market recovery and other considerations such as financial stability,” James Marple, senior economist at TD Economics, wrote in a research note.
The forecast suggests that Fed policymakers will continue to pare their monthly bond purchases, which are intended to stimulate growth by keeping interest rates low.
At a glance
Steady economy is predicted
WASHINGTON — Federal Reserve officials expect the U.S. economy to grow at a slightly slower but steady pace in 2014.
The Fed on Wednesday projected growth of 2.8 percent to 3 percent this year, a bit lower than its December projection of between 2.8 percent and 3.2 percent.
The forecast suggests that Fed policymakers will continue to pare their monthly bond purchases, which are intended to stimulate growth by keeping interest rates low. The Fed’s first policymaking meeting under new Chair Janet Yellen ended Wednesday.
The projections also showed that Fed officials now think its short-term benchmark interest rate will rise slightly faster in 2015 than they thought three months ago. Most Fed policymakers say the rate will be 1 percent or higher by the end of 2015. In December, a majority thought it would be less than 1 percent by then.
The Fed forecasts that the unemployment rate will drop to 6.1 percent to 6.3 percent by the end of this year, down from its December projection of 6.3 percent to 6.6 percent.
The Fed releases its economic projections four times each year. The reports guide its rate rulings.