Federal Reserve to be ‘patient’ with rate hike

Otmane El Rhazi from The Bullion Desk.

The Federal Reserve said that it is not in a rush to raise interest rates, in what was seen as a moderately doveish policy statement.

The members of the Fed’s policy are locked in what’s become an increasingly public debate on when will be the right time to raise interest rates, which have been near zero since December 2008. The current market consensus is that the first hike will happen sometime in the middle of 2015.

The Federal Open Market Committee (FOMC) said on Wednesday that it can be “patient in beginning to normalize the stance of monetary policy”, adding that this new language is consistent with its previous position that the federal fund rate will remain unchanged for a “considerable time” following the end of its asset purchase programme (QE3) in October.

“This was carefully crafted statement. [The Fed] wants to get away from ‘considerable time’ but they didn’t want to damage the markets, especially considering how volatile they have tuned recently,” a US-based fund manager.

“Adding the ‘patient’ phrase is a clever way to both include ‘considerable time’ but also to step away from it. But ultimately, this word play shouldn’t change the [rate hike] timetable [of mid-2015],” he added.

In the markets, gold for February delivery on the Comex division of the New York Mercantile Exchange was last at $1,188.80 per ounce, about $6 lower than when the FOMC statement was released. The yellow-metal swung within a wide range of $1,185.80 to $1,203.10 in the Fed’s wake.

But it was the equity markets that were the big movers. The Dow Jones industrial average, for example, was last up by 242 points, or 1.58 percent, at 17,339.

SOME DISSENT

Meanwhile, there’s not unanimity on the Fed board as it relates to the timing of a rate hike.

Three Fed officials dissented: two hawks, Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, and one dove, Minneapolis Fed President Narayana Kocherlakota.

Fisher said that the improvement in the US economic performance since October has moved forward, further than the majority of the FOMC envisions, so it could be appropriate to increase the federal funds rate sooner rather than later.

Kocherlakota said that the FOMC statement, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility the Fed’s two percent inflation target.

In a post-FOMC press conference, Fed chairwoman Janet Yellen said the the Fed “is unlikely to begin the normalization process for at least the next couple of meetings” but stressed that the FOMC would still consider a rate hike at any meeting should the economy improve more quickly than expected.

She also said that the recent decline in oil prices is “likely to be on net a positive” for the US economy.

“It’s something that’s certainly good for families, for households, it’s putting more money in their pockets having to spend less on gas, on energy. In that sense it’s like a tax cut,” Yellen said.

Light sweet crude (WTI) oil futures for January delivery on the Nymex is just just about a five-and-a-half year low at $55.89 per barrel.

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