http://www.nytimes.com/2014/12/18/business/federal-reserve-interest-rates-yellen.html 2014-12-17 20:41:39 Federal Reserve Says It Will Be ‘Patient’ on Interest Rate Timing The Fed indicated that it remains on course to start raising short-term rates next year, but is no longer saying it will wait a “considerable time.” === WASHINGTON — The In a statement issued after a two-day meeting of its policy-making committee, the Fed indicated that it remains on course to start raising short-term interest rates next year, but emphasized it would be cautious in deciding the exact timing. The Fed removed from the policy statement the phrase that it would wait a “considerable time” before starting to raise rates, widely interpreted as meaning at least six months, but it said it did not mean to signal a change in intentions. “The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” said The change in language, however, was backed by just seven of the 10 members of the policy-making committee, led by the Fed’s chairwoman, Janet L. Yellen. The committee showed signs of fragmentation, with dueling dissents in favor of more and less patience. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, dissented because he said the Fed should do more to boost inflation. Richard Fisher, president of the Federal Reserve Bank of Dallas, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, both dissented because they said the Fed was not retreating fast enough. None of the men, however, will serve among the voting members of the committee next year. They will be replaced by other presidents of reserve banks. Fed officials continue to forecast that they will start to raise interest rates next year, according to an But the level they expect rates to reach by the end of the year slipped slightly to 1.125 percent, down from 1.27 percent in September. The officials predicted the unemployment rate would fall into the range they regard as normal in 2015, ending the year between 5.2 percent and 5.3 percent. At the same time, they sharply downgraded their inflation expectations for 2015, predicting that prices would rise between 1 percent and 1.6 percent. In September they had predicted inflation in 2015 between 1.6 percent and 1.9 percent. Officials are still confident inflation will rebound toward the 2 percent annual pace the Fed aims for and regards as most healthy. The forecast for 2016 remained unchanged, with a predicted pace between 1.7 percent and 2 percent. The sluggish pace of inflation has replaced unemployment as the main reason the Fed is keeping short-term interest rates near zero. The job market has not healed completely, but Ms. Yellen and other Fed officials think the economy is now strong enough to start raising rates toward more normal levels next year. Employers have added, on balance, a monthly average of 224,000 new jobs over the 12 months ending in November, including 321,000 new jobs in November. The unemployment rate has fallen to 5.8 percent from 7 percent over the last year. Fed officials also have expressed relatively little concern about the collapse of oil prices, the unraveling of the Russian economy or turbulence in global markets. “The ruble doesn’t matter for the U.S. economy,” Michael Feroli, the chief United States economist at JPMorgan Chase, wrote in a preview of the Fed’s meeting. “Lower oil prices and interest rates are good things.” Moreover, the Fed is likely to welcome a little more wariness in global markets. “It would be odd,” he said, "for the Fed to pivot from repeatedly warning of excessive risk-taking in corporate credit markets to warning about excessive risk aversion in those same markets.” But Fed policy has failed to lift inflation back toward the 2 percent annual pace the central bank has fixed as its target. The Fed’s preferred measure of inflation increased by just 1.4 percent during the 12 months ending in October, and the annual pace has not touched 2 percent in more than two years. The collapse of oil prices is likely to further suppress inflation in the coming months, but Fed officials have largely dismissed that as an artificial hit that will have little effect on the underlying pace of inflation. “The lower inflation that we’ll get from the lower price of oil is going to be temporary,” the Fed’s vice chairman, Stanley Fischer, said this month in New York. “I wouldn’t worry about that very much” Mr. Fischer said, because the further lowering of inflation “is actually happening as a result of a phenomenon that’s making everyone better off, and furthermore likely to increase G.D.P. rather than reduce it.” Market-based measures of future inflation have also fallen sharply. The compensation that investors are demanding for expected annual inflation over the next five years has fallen below 1.2 percent, the lowest level since the summer of 2010, shortly before the Fed began its second round of bond purchases. Fed officials have downplayed the significance of this trend, too. The Fed in its “I remain confident, despite the recent softening, that inflation will begin to move up towards our 2 percent objective next year,” William C. Dudley, the president of the Federal Reserve Bank of New York, said in a speech this month. But Charles L. Evans, president of the Federal Reserve Bank of Chicago, said in an interview in early December that the Fed needed to focus on getting inflation back up to 2 percent. He said the surveys were also imperfect, because it’s not clear that participants are paying attention. They routinely overestimate the level of inflation, and their expectations have rarely changed in recent years. “It’s either rock solid and the public understands it or they really don’t move for any reason,” Mr. Evans said. “So the fact that the market measures have moved down makes me nervous, perhaps more nervous than some others.”