The Federal Reserve could end its bond-buying stimulus this fall, and interest rates could start to rise six months later, Fed Chair Janet Yellen said yesterday after leading the Federal Open Market Committee meeting for the first time.
U.S. stocks fell slightly on the news that the Fed's first rate hike could come as soon as April 2015, rather than the second half of 2015, if the Fed continues tapering its "quantitative easing" program. Yesterday, it reduced the monthly bond-buying pace by $10 billion, to $55 billion, as expected.
"The FOMC continues to see sufficient underlying strength in the economy to support ongoing improvements in the labor market," Yellen said.
The Fed now will look at a broader range of data to determine the economy's strength and when to raise rates instead of tying plans to keep them steady to "well past the time" when the unemployment rate drops below 6.5 percent. But, Yellen stressed, that "does not indicate any change in the committee's policy intentions." Its assessment will consider labor market, inflation and financial market indicators, the Fed said.
"They had attempted to offer forward guidance a little over a year ago in terms of the unemployment rate — that's become obsolete," said Jeffrey Frankel, an economist at Harvard's Kennedy School. "There's nothing to suggest in (yesterday's) news that they have yet to come up with a replacement."
The Fed is moving in the right direction with its stimulus reductions, but doing so too slowly, said Laurence Kotlikoff, a Boston University economics professor. "Countries that have printed this much money to pay their bills get into trouble eventually with inflation," he said.
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