Fed promises 'patient' approach in determining when to raise interest rates | Business News

Fed promises ‘patient’ approach in determining when to raise interest rates

18 Dec 2014 | Author: | No comments yet »

Asian Stocks Advance After U.S. Share Rally as Fed Vows Patience.

WASHINGTON — The Federal Reserve is edging closer to raising interest rates from record lows because of a strengthening U.S. economy. With oil prices in freefall, Japan in recession and the euro zone sputtering, the Fed for a second consecutive meeting will weigh the US economy’s apparent strength against overseas risks that now include a potential currency crisis in oil exporter Russia. The Fed said it will be patient on the timeline for higher rates, replacing a pledge to keep borrowing costs near zero for a “considerable time,” even as the economy strengthened. Fed officials have expected a temporary softening of inflation given the big plunge in oil prices, but have indicated that signs of strength in the job market elsewhere have left them confident that US wages and prices will eventually start to rise.

The Standard & Poor’s 500 Index jumped 2 percent yesterday while the yen slid 1.9 percent against the dollar. “Asian markets will be comforted by the rise in the U.S.,” Angus Gluskie, managing director at White Funds Management in Sydney where he oversees about $550 million, said by phone. “But it doesn’t really alter the fundamentals, which are growth in the U.S. is good and the sharp drop in the oil price and Russian currency are still likely to destabilize markets.” Japan’s Topix (TPX) index climbed 2.4 percent. At a time of global economic turmoil and collapsing oil prices, she stressed that the Fed was making no policy changes. “The Fed is sending the message that the broader U.S. economy is on the path toward healing,” said Steven Ricchiuto, chief economist at Mizuho Securities. “They don’t know how fast it will heal, but it’s on the mend.” Uncertainty about when the economy will fully heal from the ravages of the Great Recession, which officially ended 5½ years ago, is why the Fed’s policy statements remain vague, Ricchiuto added. The stock market tends to applaud low rates because they make it easier for individuals and businesses to borrow and spend, and they cause many investors to shift money into stocks in search of higher returns. Most economists think the Fed’s first rate increase will occur in June as long as its inflation outlook doesn’t remain persistently below its target rate of 2 percent. Fed Chair Janet Yellen said a rate increase is possible at every meeting, though she doesn’t foresee the first increase in interest rates for “at least the next couple of meetings.” While the statement didn’t mention global market turmoil sparked by oil and the Russian currency crisis, Yellen said any spillover from the financial crisis in Russia is likely to be small.

Futures on Hong Kong’s Hang Seng Index rose 0.3 percent in their most recent trading session, and contracts on the Hang Seng China Enterprises Index added 0.4 percent. But the economy is growing and adding jobs persistently despite the phase-out of fiscal stimulus and the end of a Fed effort to add some juice by buying bonds. Until now, the Fed has relied on guidance in its statements – notably the “considerable time” phrase – as one more way to help stimulate the economy. The Fed statement Wednesday said inflation “has continued to run below the Committee’s longer-run objective” of about 2 percent a year – implying one reason why the policy committee is hesitant to move too soon.

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