Investing.com -- Federal Reserve chair Janet Yellen said Wednesday that the Fed will remove a reference to remaining patient from its minutes, paving the way for an interest-rate hike at some point this year.
While Ms. Yellen indicated that its benchmark Federal Funds Rate could be increased later this year, it will not occur until after the Federal Open Market Committee’s next meeting in April, at the earliest. Yellen added that the timing of the decision will be “data dependent,” and that a rate hike will not necessarily be made in June.
Drawing comparisons with Alan Greenspan by striking a well-balanced tone for the Fed’s short-term outlook, Yellen appeared hawkish with the removal of patience, but dovish with forecasts for weaker inflation and GDP growth. The Fed expects Real GDP to grow between 2.1 and 3.1% for the remainder of 2015, below expectations of a Wall Street Journal survey of prominent economists who predicted growth of 1.9 to 3.7% by year's end. The Fed projects inflation of 0.6% to 0.8% in 2015 and 1.7% to 1.9% in 2016. Last month in testimony before Congress, Yellen said that the Fed wanted to see inflation move toward its target goal of 2% before it raised interest rates.
In spite of the revisions, Yellen went out of her way to note that overall the forecast was not weak. She pointed to improvements in the labor market, forecasts for "above trend growth," and estimates of lowering unemployment to 5% by year's end to underscore her optimism.
“We do see considerable underlying strength in the US economy in spite of what looks like a weaker first quarter," Yellen said.
Yellen blamed a stronger dollar, which moved to a 12-year high against the euro last week, for the restrained economic forecasts.
"I don’t have a quantitative estimate to offer, but I certainly expect net exports to serve as a notable drag this year on the outlook," Yellen said.
The U.S. Dollar Index, which measures the strength of the greenback versus six other major currencies, plunged to 96.75 at the market's close. The index reached 99.68 minutes before Yellen's statement was released. The euro also gained more than 2.5% against the dollar reaching a level 1.0875, days after slipping below 1.06.
Stocks rallied broadly amid the weaker dollar in late-afternoon trading to reverse previous losses earlier in the day. The Dow Jones Industrial Average gained 227.11 points or 1.27% to close at 18,076.19. Stocks were down on the Dow by about 95 points minutes before the Fed released its statement at 2 p.m. EST. The S&P 500 Composite index and NASDAQ Composite index also rebounded from earlier losses on the day to close broadly higher.
In a signal that investors expect the Fed to raise interest rates shortly, the yield on U.S. 10-Year Treasuries plunged more than 6% to 1.918. Yields on short-term sovereign debt dove even further, as U.S. 2-Year Treasuries dropped by nearly 17% to 0.557.
As expectations of an interest rate hike mounted late last year, several members of the FOMC warned of the consequences of raising rates too quickly. Drawing parallels to the crisis that ensued in 1937, New York Fed President William Dudley and Chicago Fed President Charles Evans described how declining inflation strengthens the case for avoiding premature tightening. More recently, Sweden was forced to cut its benchmark rate to zero following premature rate hikes in 2010 and 2011.
Conversely, Yellen noted that for years research has indicated that major shifts in monetary policy can have a lagging effect on the economy. As a result, the Fed is as cognizant of the risks of waiting too long to raise rates.
"Just as we don’t want to be premature in tightening policy and aborting a recovery that we have worked long and hard to proceed as far as it has, we also don’t want to be behind the curve and beginning to tighten given those lags," Yellen said.
The U.S. central bank has kept interest rates at near zero since 2009, following the Financial Crisis.