Fed still patient on rates, says U.S. economy expanding at solid pace

The Federal Reserve appeared to be paving the way for an earlier-than-expected increase in interest rates on Wednesday night, as it highlighted the recent strength of the US economy.

After its two-day meeting, the Fed announced that borrowing costs would remain unchanged, at 0-0.25%; but seasoned Fed-watchers pointed out that in the accompanying statement, it had upgraded its assessment of the strength of the world’s largest economy.

“Economic activity has been expanding at a solid pace,” the Fed said. “Labour market conditions have improved further, with strong job gains and a lower unemployment rate.”

Janet Yellen, who took over as Fed chair a year ago, has stressed that with oil prices plunging, she wants to see evidence that inflation is returning to its 2% target before she agrees to a shift in rates.

But markets saw the relatively upbeat language about growth and jobs as a sign that opinion at the Fed is shifting towards an increase in borrowing costs.

Economists are bitterly divided about when monetary policy should be tightened. Some Fed policymakers are nervous that falling unemployment could soon spark inflation.

But outside experts, including Nobel prizewinner Paul Krugman, have warned that high levels of debt among many US households would make an early rate rise risky.