Home' Trinidad and Tobago Guardian : December 21st 2014 Contents SBG10 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 21 • 2014
If you didn t know about the
lingering damage from the
Great Recession, the US econ-
omy would appear remarkably
strong. The unemployment rate
is a close-to-healthy 5.8 per
cent. Inflation is unusually low.
Crashing oil prices are reward-
ing consumers with a tax cut of sorts.
Yet the Federal Reserve made clear
Wednesday that it s eyeing those
improvements with caution. The Fed
isn t yet convinced it can start to pull
away its stimulus of record-low interest
Though the Fed has kept its key rate
near zero for nearly six years to encourage
borrowing, spending and investment,
the economy has yet to fully repair the
destruction from its worst crisis in 80
Many workers remain trapped in part-
time jobs. Paychecks are barely rising.
Home ownership is dropping. Slumping
oil prices have reduced inflation to a level
so low it could eventually discourage
spending and further stifle wage growth.
So the US central bank declared it
would be "patient" in deciding when to
raise its benchmark rate from a record
low, where it s been since December
"There is no preset time," Fed Chair
Janet Yellen explained at a news con-
Her message was that the strength of
US economic data and the level of infla-
tion, not a calendar deadline, will dictate
when the Fed ultimately raises rates. At
a time of global economic turmoil and
collapsing oil prices, Yellen stressed that
the central bank was making no policy
"They re doing what everyone else is
doing; following the data and trying to
anticipate where we ll be six months or
a year from now," said Seth Masters,
chief investment officer for Bernstein
Global Wealth Management.
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 2.0
per cent. In an updated economic out-
look, the Fed lowered its inflation forecast
for next year to between 1.0 per cent
and 1.6 per cent.
Because inflation remains so low, Yellen
said she would be comfortable waiting
until the unemployment rate fell from
its current 5.8 per cent to historically
low levels to help put upward pressure
Uncertainty about when the economy
will fully heal from the ravages of the
Great Recession is why the Fed s policy
statements remain somewhat vague.
"What they re trying to say is they
need to have some wiggle room," Masters
said. "They don t want to rope themselves
into making a decision that might look
extremely stupid three or six months
down the road."
On Wednesday, stock investors cheered
the Fed s strategy. The Dow Jones indus-
trial average, which had been up about
160 points before the Fed issued its state-
ment, roared higher to close up 280
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
Energy prices have plunged since the
Fed last met in October, with oil hitting
a five-year low. That price drop is reduc-
ing inflation further below the Fed s 2.0
per cent target, which could heighten
the pressure to delay a rate hike until
inflation rebounds. On Wednesday, the
government said consumer prices rose
just 1.3 per cent in November compared
with 12 months ago.
But Yellen noted that oil price spikes
in the past had only temporarily raised
inflation and suggested that a corre-
sponding drop will likely also have only
a "transitory" effect on inflation.
She was more optimistic about the
benefits of lower oil prices for the US
"The decline we have seen ... is likely
to be on net a positive," Yellen said. "It s
something that s certainly good for fam-
ilies, for households. It s putting more
money in their pockets... It s like a tax
cut that boosts their spending power."
At the same time, she noted that
cheaper oil can undercut wage growth
and keep inflation below target.
The Fed s statement was approved on
a 7-3 vote. The three dissents reflected
the sharp divisions inside the Fed as it
transitions from an extended period of
ultra-low rates to a period in which it
will start to raise rates. The Fed has not
raised rates in more than eight years.
The dissents included Presidents
Richard Fisher of the Dallas Fed and
Charles Plosser of the Philadelphia Fed,
who have long stressed the need for the
Federal Reserve Chair
Janet Yellen speaks
with reporters at the
Federal Reserve in
17, 2014. The Federal
Reserve is edging
closer to raising
interest rates from
record lows given a
strengthening US job
market and economy.
But it says it will be
patient in determining
when to raise rates.
The Fed said
Wednesday after a
policy meeting that
such an approach is
consistent with its
previous guidance that
it expected to keep its
benchmark rate near
zero for a
Fed to prevent high inflation.
Narayana Kocherlakota, president
of the Fed s Minneapolis regional
bank, dissented for a different rea-
son: He thinks the Fed should do
more to boost inflation to its 2.0
per cent target.
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. The
5.8 per cent unemployment rate is
close to the 5.2 per cent to 5.5 per
cent range that the central bank
considers maximum employment.
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