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Fed to be 'patient' about a rate hike; stocks soar

 
Published Dec. 18, 2014

WASHINGTON — The Federal Reserve is edging closer to raising interest rates from record lows because of a strengthening U.S. economy. But it will be "patient" in deciding when to do so.

That was the message sent Wednesday as the Fed ended a meeting amid heightened expectation about a forthcoming rate increase. At a news conference afterward, Chair Janet Yellen said she foresaw no rate hike in the first quarter of 2015.

The Fed said in a statement that a "patient" approach to raising rates is consistent with its previous guidance that it would keep its key rate near zero for a "considerable time."

The Fed's key short-term rate has been at a record low near zero since December 2008.

Yellen said the strength of U.S. economic data and the level of inflation, not a calendar date, will dictate when it raises rates. At a time of global economic turmoil and collapsing oil prices, she stressed that the Fed was making no policy changes.

"The Fed is sending the message that the broader U.S. economy is on the path toward healing," said Steven Ricchiuto, chief economist at Mizuho Securities. "They don't know how fast it will heal, but it's on the mend."

Uncertainty about when the economy will fully heal from the ravages of the Great Recession, which officially ended 5½ years ago, is why the Fed's policy statements remain vague, Ricchiuto added.

Stock investors applauded the Fed's message. The Dow Jones industrial average, which had been up about 160 points before the Fed issued its statement, closed up 288 points. The Standard & Poor's 500 stock index gained 40.15 points. The stock market tends to applaud low rates because they make it easier for individuals and businesses to borrow and spend, and they cause many investors to shift money into stocks in search of higher returns.

Most economists think the Fed's first rate increase will occur in June as long as its inflation outlook doesn't remain persistently below its target rate of 2 percent. In an updated economic forecast Wednesday, the Fed lowered its inflation forecast for next year to between 1 and 1.6 percent.

Since the Fed's last meeting, the job market and other sectors of the economy have strengthened. Employers added 321,000 jobs in November, sustaining the healthiest year for job growth since 1999.