FILE - In this Dec. 17, 2014 file photo, Federal Reserve Chair Janet Yellen speaks with reporters at the Federal Reserve in Washington. After more than six years of keeping interest rates near zero, the Fed is laying the groundwork to begin increasing its benchmark. (AP Photo/Cliff Owen, File)The Associated Press
After more than six years of keeping interest rates near zero, the U.S. Federal Reserve is laying the groundwork to begin increasing its benchmark.
In a statement Wednesday, the U.S. central bank took out a key word that it had been using to give some indication about where rates were headed. The bank had been saying it would be "patient" before the commencement of a tightening phase, but that word vanished Wednesday. However, the change came with a note of caution from Federal Reserve chair Janet Yellen.
"Just because we removed the word patient doesn't mean we're going to be impatient," Ms. Yellen said.
An interest rate hike as early as June is now a possibility. However, the central bank also downgraded its outlook for economic growth, leaving some analysts expecting rates to move in September.
The Fed forecasts real economic growth of 2.3 to 2.7 per cent for 2015, down from an estimated range of 2.6 to 3.0 per cent in December. Core inflation, which excludes volatile items such as energy and food, is also projected to increase at a slower pace than predicted in December. And the rising value of the U.S. dollar will make exports more expensive, further limiting growth.
On the other hand, Ms. Yellen emphasized that this is by no means a weak forecast: The U.S. is still expected to realize above-trend growth while the job market continues to strengthen. All of that is good news for Canada.
"Domestic demand is still going to be there, and Canada is going to benefit from that," said TD senior economist Michael Dolega. "With U.S. consumers hopefully digging themselves out of the Northeast snowstorms soon, demand for our goods will be quite robust."
Stock markets cheered the news that the Federal Reserve is in no rush to raise rates, with the Dow Jones industrial average swinging from over 150 points down early in the day to finishing the session up more than 200 points.
The Fed statement and Ms. Yellen's commentary fostered weakness in the U.S. dollar, prompting the Canadian dollar to surge from a six-year low against the greenback to post its largest intraday gain in six years, briefly breaking above 80 cents (U.S.).
The S&P/TSX composite index also managed to reverse its prior losses and finished up 63.71 points, or 0.43 per cent, at 14,962.24 on Wednesday. Weakness in the U.S. dollar also drove up the price of oil, which jumped $1.20, or almost 3 per cent, to close at $44.66 a barrel.
The Federal Reserve has a dual mandate to target both maximum employment and price stability, and has had mixed success in achieving these goals. While the headline unemployment rate has improved significantly since the depths of the recession, inflation remains stubbornly below the central bank's 2-per-cent target.
The Fed said it will begin to raise rates when it is "reasonably confident" that inflation will trend back to target and the labour market shows more strength.
But don't expect Ms. Yellen and her colleagues to telegraph the timing of the first hike.
Forward guidance from the world's most important central bank is becoming increasingly vague, allowing Ms. Yellen to retain flexibility to re-evaluate the appropriateness of its current stance as more economic data are released.
Stronger wage growth is sought after, but not a prerequisite for raising rates, said Ms. Yellen, who also failed to provide much insight on what would constitute sufficient improvements in the labour market.
Economists are divided over whether a rate rise will occur in June or September.
"If employment figures remain strong and growth and wages pick up as we anticipate, a first hike in June remains on the table," said CIBC World Markets economist Andrew Grantham.
"Weakness elsewhere and the stronger U.S. dollar have manifested on growth faster and by more than was anticipated," said Mr. Dolega of TD, who believes the first hike will come in September. "The Fed seems to be willing to give the recovery a little bit of breathing room to run a little hot before beginning a tightening cycle."