Fed: No rate hike until job market improves, inflation rises

WASHINGTON (AP) - The Federal Reserve signaled Wednesday that it needs to see further improvement in the job market and higher inflation before it raises interest rates from record lows.

At the same time, the Fed at least opened the door to a rate increase later this year by no longer saying it will be "patient" in starting to raise its benchmark rate.

The statement the Fed issued after its latest policy meeting appeared to catch investors by surprise in suggesting a rate increase might be further off than many had assumed. Stock prices surged and bond yields fell in the minutes after the news.

The Fed has kept its key short-term rate near zero since late 2008 to bolster the economy after a devastating financial crisis and recession. In its statement, the Fed noted the economy, which it previously said was expanding solidly, has "moderated somewhat."

Since December, the Fed had said it could be "patient" in beginning to raise its benchmark rate from near zero. Most analysts said dropping "patient" from its statement would signal the Fed was moving toward a rate increase, perhaps as soon as June. A rate hike would ripple through the economy and could slow borrowing and possibly squeeze stocks and bonds.

But other economists had said that even if the Fed dropped "patient," any rate increase would reflect the latest data and the Fed would remain flexible. Key sectors of the economy have been less than robust of late, and inflation remains far below the Fed's target rate.

Dan Greenhaus, chief strategist at BTIG, said the Fed's statement Wednesday lowered the odds of June rate hike.

"What's important about this part of the statement is that it clearly says the FOMC is looking for "further' improvement, meaning the economy and labor market have not yet met whatever criteria necessary to warrant a rate hike," Greenhaus said in a note to clients.

The Fed's action was approved on a 10-0 vote.

In its characterization of the economy, the Fed's statement said export growth has weakened, a trend that partly reflects a stronger dollar that's made U.S. goods costlier overseas.

The statement said before raising rates, Fed officials want to be "reasonably confident that inflation will move back to its 2 percent objective over the medium term."

On Wednesday, the Fed also downgraded its quarterly economic forecasts. It cut its estimate of growth this year to a range of 2.3 percent to 2.7 percent, from an estimate of 2.6 percent to 2.7 percent in its last forecast issued in December. It was an acknowledgment that some key indicators have been weaker than expected in recent months.

The Fed also forecast the unemployment rate can now fall further without spurring inflation, a sign that it may move slowly in raising rates.

Officials reduced their estimate of the unemployment rate that they think is consistent with a healthy economy to a range of 5 percent to 5.2 percent. That's down from a previous range of 5.2 percent to 5.5 percent. Unemployment now stands at 5.5 percent, the top of the previous range.

In testimony to Congress last month, Chair Janet Yellen cautioned that even when "patient" is dropped, it won't necessarily signal an imminent rate hike - only that the Fed will think the economy has improved enough for it to consider a rate increase on a "meeting-by-meeting basis."

A complicating factor is a surging U.S. dollar, which is helping keep inflation excessively low and posing a threat to U.S. corporate profits and possibly to the economy.

Historically, the Fed raises rates as the economy strengthens in order to control growth and prevent inflation from overheating. Over the past 12 months, U.S. employers have added a solid 200,000-plus jobs every month. And unemployment has reached a seven-year low of 5.5 percent, the top of the range the Fed has said is consistent with a healthy economy.

The trouble is the Fed isn't meeting its other major policy goal - achieving stable inflation, which it defines as annual price increases of around 2 percent. According to the Fed's preferred inflation gauge, prices rose just 0.2 percent over the past 12 months. In part, excessively low U.S. inflation reflects sinking energy prices and the dollar's rising value, which lowers the prices of goods imported to the United States.

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