Fed Flags Slow Pace for Rate Hikes

By Jon Hilsenrath 

        WASHINGTON--The Federal Reserve signaled Wednesday that it was moving toward interest-rate increases later this year, with the economy now firmer after a winter slump, but officials emphasized they would move even more cautiously than expected.
        "Economic conditions are currently anticipated to evolve in a manner that will warrant only gradual increases in the target federal-funds rate," Fed Chairwoman Janet Yellen said in a press conference following the Fed's two-day policy meeting.
        As part of its release, the Fed suggested it might raise rates only once in 2015 by a quarter percentage point, rather than twice as many officials previously anticipated. By December 2017, the Fed expects its benchmark short-term interest rate to remain below 3%, far lower than it has been for the past half century this long into an economic expansion.
        For now, the Fed said a benchmark interest rate near zero, where it has been since December 2008, "remains appropriate." Inflation has been running below the Fed's 2% inflation target for three years and officials want to be sure it is moving up before changing rates. They also want to see more progress on jobs.
        Investors took the signals coming from the central bank in stride. The Dow Jones Industrial Average finished the day up 31.26 points, or 0.2%, at 17935.74. Yields on 10-year Treasury notes were barely changed, finishing the day at 2.306%.
        After months of hearing the Fed talk about raising rates, business leaders in interest-rate-sensitive sectors sound increasingly prepared for the Fed to start moving.
        "I think the economy is ready," said Glenn Kelman, chief executive of Redfin, a national real-estate brokerage based in Seattle.
        Mr. Kelman said he is seeing home prices appreciate at a double-digit pace in some markets, raising worries that home values are getting inflated by an extended period of rock-bottom borrowing costs.
        "I think cheap credit has caused home prices to accelerate faster than they otherwise would have," he said.
        The Fed's June policy meeting--which ran Tuesday and Wednesday--had been the subject of intense focus earlier in the year. Fed officials declared in March that the session would be a "live meeting" when an interest-rate increase was possible if the economy had performed up to expectations. Even before that, many Fed officials indicated they thought a rate increase in June was a likely scenario. Then a winter slowdown derailed that plan, and officials in recent weeks had pulled away from a June move.
        In a policy statement accompanying its newest economic and interest-rate projections, the Fed pointed with some relief toward an improving economic backdrop after output contracted in the first quarter. Economic activity had been "expanding moderately" after a winter stall, the Fed said, and job gains had "picked up." Recent reports show sales by retailers and auto dealers rebounded in May, news that helped to reassure Fed officials.
        While inflation continued to run below its 2% objective, the Fed noted energy prices had stabilized after driving inflation lower.
        "We see a lot more strength in the economy today than we saw several years back," said Jack Hartings, chief executive of Peoples Bank Co. of Coldwater, Ohio, a bank with $450 million in assets and seven branches. "From that perspective, we should be ready for it," he said of the prospect of rate increases. He added that the bank's depositors, strained by low returns on certificate of deposit, were also prepared for rates to start rising.
        "My colleagues and I would like to see more decisive evidence that moderate pace of economic activity can be sustained," Ms. Yellen said.
        In forecasts the Fed released Wednesday about its interest-rate outlook, 15 of 17 officials said still they expected to start raising short-term interest rates before the end of 2015, despite the winter economic slowdown.
        The interest-rate projections showed that two officials don't want to move rates at all this year. Five officials, on the other hand, want to move rates up by a quarter percentage point and five others want to move it up by half percentage point. In March, only one official saw a quarter-percentage-point increase and seven saw a half-percentage-point rise. The shifts show the center of gravity on the number of rate increases this year is moving down.
        Projections for the years to come are moving down as well. The median estimate for rates in 2016 has shifted down to 1.625% from 1.875% in March. The median estimate for 2017 has shifted down to 2.875% from 3.125% in March.
        "I want to emphasize sometimes too much attention is placed on the timing of the first increase in the federal-funds rate," Ms. Yellen said in the postmeeting press conference. "What should matter to market participants is the entire expected trajectory of policy."
        The shifts in interest-rate projections suggested officials have become less certain about the longer-run vigor of the U.S. economy and its capacity to withstand higher rates.
        The economy has been prone to stumbles throughout the expansion. Fed officials have emphasized headwinds holding it back, including the large debt burdens borne by households after the housing boom of the previous decade, and constrained fiscal policy.
        Increasingly the Fed has turned its attention to diminished growth in worker productivity, which has restrained the economy's capacity to grow quickly.
        In economic projections accompanying the Fed's statement, the central bank revised down its estimate of growth for 2015. In March the Fed saw economic output expanding by 2.3% to 2.7% this year. In the latest estimate it revised output growth to 1.8% to 2.0%.
        The Fed has consistently for several years found itself revising down growth estimates after early-year stumbles.
        Against that backdrop, officials have become doubtful about whether they can push rates very high in this business cycle. During a cycle of interest-rate increases from 2004 to 2006 they went up to 5.25%. In 2000, the Fed's benchmark rate reached 6.50%.
        This time around, Fed officials believe short-term rates could get to 3.75%, and probably won't even be there, by the end of 2017.
        For the fourth straight meeting, Ms. Yellen won uniform agreement on the rate decision with no dissents. However, maintaining consensus could become more challenging as the Fed moves toward actual action.
        The Fed is populated by officials with a wide range of views about where rates ought to go in the coming years. In 2016, for example, rate estimates among officials inside the Fed range from just above 0.25% to near 3%.
        That could be a precursor to difficult decisions in the months ahead.
        Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
        (END) Dow Jones Newswires

        June 17, 2015 19:06 ET (23:06 GMT)

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