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BUSINESS
Janet Yellen

Fed signals possible rate hike in months

Paul Davidson
USA TODAY
Federal Reserve Chair Janet Yellen presided over this week's meeting of Fed policymakers.

WASHINGTON — The Federal Reserve signaled Wednesday that it could raise near-zero short-term interest rates within months amid an accelerating economy despite low inflation that has been subdued by falling oil prices.

But it hedged its intentions, saying any decision on raising rates would depend on policymakers' assessment of the economy's progress.

Fed Chair Janet Yellen said in a press conference Wednesday that policymakers consider an increase in the Fed's benchmark rate unlikely at the next couple of meetings, which will be in January and March. That suggests the first rate hike could come as early as April, but Yellen also said her guidance "doesn't point to any pre-set or predetermined timetable."

Investors liked what they heard. The Dow Jones industrial average closed up 288 points Wednesday.

In its statement after a two-day meeting, the Fed modified a long-standing assurance that its benchmark rate is likely to stay near zero "for a considerable time" after the end of a bond-buying program that was halted in October. The bond purchases were aimed at pushing down long-term interest rates.

Instead, the Fed said it still views the current target range for its key rate as "appropriate" and that it "can be patient" as policymakers consider the timing of the Fed's first rate hike since 2006. The Fed statement said policymakers viewed Wednesday's guidance "as consistent with its previous statement" that it would likely keep rates near zero "for a considerable time" after asset purchases ended.

The symbolic step clears a path for the central bank to raise rates as early as around mid-2015, a move that would be roughly consistent with Fed policymakers' median forecast.

Policymakers' forecasts released Wednesday show they now expect the Fed's benchmark short-term rate to rise a bit more slowly than they predicted in September. They expect the rate to be about 1.1% at the end of 2015 and about 2.4% at the end of 2016, below their earlier estimates of 1.3% and 2.8%.

Economists have been skeptical that rates will rise by mid next year, with futures contracts indicating investors expect the first rate hike in fall 2015. Several leading economists predicted the Fed would foreshadow the possibility of an earlier increase this week at least partly to adjust investors' expectations and avoid an abrupt jump in market-based rates next year.

But Fed officials have repeatedly said the actual timetable for a rate increase could be sooner or later than anticipated, depending on the labor market's progress and inflation, and reiterated that caveat Wednesday.

On Wednesday, the policymakers revised up their forecast range for economic growth this year to 2.3% to 2.4% from their estimate of 2% to 2.2% in September. They also expect unemployment, now 5.8%, to fall to 5.2% to 5.3% by the end of next year, below the previous forecast of about 5.5%.

Yet they also expect more modest inflation of 1% to 1.6% next year amid low oil prices, below the earlier projection of 1.6% to 1.9%. They expect core inflation, which excludes volatile food and energy costs, to be slightly lower as well, with prices rising 1.5% to 1.8% vs. their earlier projection of 1.6% to 1.9%.

Recently, government reports have shown a further pickup in growth. The economy expanded at a 3.9% annual rate in the third quarter, and employers added 321,000 jobs in November. Unemployment has fallen to a near-normal 5.8% from 7% over the past year, and retail sales and factory output both surged last month.

"Employment is rising at a healthy rate, and the U.S. economy is strengthening," Yellen told reporters. She added, however, "Even so, there is room for further improvement, with too many people who want jobs unable to find them" and many Americans reluctantly working part time or too discouraged to look for jobs.

A more rapidly expanding economy typically sparks higher inflation. But weak growth overseas has contributed to a nearly 50% plunge in oil prices since June and a strong dollar that makes imports cheaper for U.S. consumers, keeping annual inflation below the Fed's 2% target.

That has some Fed officials concerned about the risk of deflation, or persistently falling prices. Deflation can lead to recession, and that threat could provide support for keeping rates lower for longer.

Fed policymakers, however, have said they focus more on core inflation, which is expected to drift toward the 2% benchmark next year. The Labor Department said Wednesday that the consumer price index fell 0.3% last month, the largest monthly change in six years, but core prices rose 0.1%.

At the same time, the sharp drop in oil and gasoline prices has lifted consumer spending and the economy, which could spur higher inflation — and an earlier rate increase — next year.

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