(Reuters) – The Federal Reserve on Wednesday renewed its pledge to keep interest rates near zero for a “considerable time,” but also indicated it could raise borrowing costs faster than expected when it starts moving.
Many economists and traders had expected the U.S. central bank to alter the rate guidance it has provided since March, given generally improving data on the economy’s performance.
But the Fed repeated its assurance that rates would stay ultra-low for a “considerable time” after a bond-buying stimulus program ends. In a statement after a two-day meeting of its policy-setting Federal Open Market Committee, it announced a further $10 billion reduction in its monthly purchases, leaving the program on course to be shuttered next month.
The statement was virtually unchanged from July, though new quarterly projections released with it showed the central bank’s view on where interest rates should be in future years is diverging from where financial markets have bet they will be.
“While the much analyzed phrase ‘considerable time’ remained in the FOMC statement, the newly announced scheme for interest rate normalization shows that higher rates are in the cards,” said John Kilduff, a partner at Again Capital LLC in New York.
Dallas Federal Reserve Bank President Richard Fisher and Philadelphia Fed chief Charles Plosser dissented, arguing the guidance on rates could tie the central bank’s hands if it felt it had to move more quickly to tighten monetary policy.
The Fed has held benchmark overnight rates near zero since December 2008 and has more than quadrupled its balance sheet to $4.4 trillion through a series of large-scale bond purchase programs.
In a further sign the central bank is in no rush to start raising rates, the FOMC repeated its assessment that a “significant” amount of slack remains in the U.S. labor market.
Stocks were little changed after the statement, but the dollar hit its highest level against the Japanese yen since September 2008. Yields on U.S. Treasury bonds rose to session highs as traders moved to price in the possibility of higher future rates.