By Jon Hilsenrath
The Federal Reserve took a delicate step toward raising
short-term interest rates in 2015, but at the same time exposed its
skittishness about signaling a historic move away from easy-money
policies in place since the global financial crisis.
In a statement Wednesday after a two-day policy meeting, the Fed
broached the prospect of "beginning to normalize the stance of
monetary policy," the most direct formal reference to raising rates
it has made in years.
Rates have been held near zero since December 2008 and since
then the Fed has offered assurances that they would stay low amid
low inflation and elevated levels of unemployment. The new
statement said the Fed would be "patient" before raising rates,
adding that the overall outlook hadn't much changed from earlier
assurances that rates would stay low for a "considerable time."
In a news conference following the meeting, Fed Chairwoman Janet
Yellen effectively said there are no promises. "The committee
considers it unlikely to begin the normalization process for at
least the next couple of meetings," she said. "This assessment, of
course, is completely data-dependent," she added, meaning it will
depend on the path of the economy.
Investors were whipsawed by the nuanced messages. Stock prices
sharply extended gains when a reference to the "considerable time"
assurance reappeared in the Fed's statement. They fell when Ms.
Yellen suggested a move after two meetings is possible, and then
shot up again. The Dow Jones Industrial Average leapt 288.00
points, or 1.69%, to settle at 17356.87.
Goldman Sachs economist Jan Hatzius said the market moves, taken
together, amounted to a vote of confidence that the Fed and economy
were on track.
The central bank's next scheduled policy meeting is Jan. 27-28.
The following is March 17-18. Several top Fed officials have said
they expect they will start lifting rates around the middle of next
year and the Fed's interest-rate projections, released with
Wednesday's statement, suggested that remains the predominant
view.
Staying on track could be a challenge, given divisions among
policy makers.
Three Fed officials dissented at the meeting, all for different
reasons, a sign of the discord that looms as the Fed chairwoman
tries to chart a course away from zero interest rates.
Dallas Fed President Richard Fisher said rate increases might
need to come sooner than the Fed plans. Minneapolis Fed President
Narayana Kocherlakota said the Fed isn't putting enough weight on
the risks of low inflation. And Philadelphia Fed President Charles
Plosser wants the Fed to stop giving time-linked guidance about its
rate plans.
"At a time like this, where we are making consequential
decisions, I think it is very reasonable to see divergences of
opinion," Ms. Yellen said at her news conference.
Fed officials' choices won't get easier in the months ahead. In
forecasts released with the statement, officials said they expected
rates to end up anywhere between 0.375% and 4% by the end of 2016.
Within that range, 17 officials project 13 different points where
interest rates might end up.
While there is no clear consensus on the outlook in two years,
their expectations for the year ahead are more clear. Fifteen of 17
policy makers said they expected to raise short-term interest rates
in 2015 and their median estimate--meaning half of estimates were
above and half below--put short-term borrowing rates at 1.125% in
12 months. The median rate estimate for 2016 was 2.5% and for 2017
was 3.625%.
Those estimates are all modestly lower than the Fed projected in
September, meaning that even though officials continue to expect to
move rates up next year, they see a very gradual approach once they
start. The estimates--though preliminary and subject to
change--imply Fed officials have in mind four quarter-percentage
point moves in 2015.
As it considers the timing and pace of rate increases, the Fed
has been faced with a mixed economic landscape. Though the job
market has improved and the Fed is sticking to forecasts for faster
economic growth in the next two years, the rest of the world has
been struggling with low or slowing growth and inflation is facing
a new downdraft that officials said they were watching closely.
Fed officials projected the domestic economy would grow at a
rate between 2.6% and 3% in 2015 and that the unemployment rate
would fall to 5.2% or 5.3%.
That would put the jobless rate in a zone officials call "full
employment," in which joblessness is low but not so low that it
sparks inflation.
Recent economic data did little to dissuade Fed officials from
this view. "Labor market conditions improved further, with solid
job gains and a lower unemployment rate," the policy statement
said.
"The tone for the outlook of the economy was relatively upbeat,"
said David Stockton, a senior fellow at the Peterson Institute for
International Economics and former head of the Fed's economic
research division. "She thought the recovery was on track."
Yet there are several wild cards that could alter the Fed's
course. The most obvious is the path of inflation. Tumbling oil
prices are pushing down consumer price inflation. The Labor
Department reported Wednesday, hours before the Fed statement was
released, that consumer prices dropped 0.3% in November from a
month earlier, the largest one month drop since the 2008 financial
crisis rocked the global economy.
Fed officials are sticking to their view that the downward
pressure on inflation will be sharp but short-lived. Officials
projected 1.0% to 1.6% consumer price inflation in 2015, a large
downward revision from earlier estimates. But they saw it returning
to between 1.7% and 2.0% in 2016 and between 1.8% and 2.0% in
2017.
Those longer-run forecasts suggest the Fed has confidence that
recent oil declines won't seriously derail their efforts to get
inflation back to the 2% goal. It has been running under that goal
for nearly three years but many officials believe that as labor
market slack diminishes, inflation will move back toward 2%.
Ms. Yellen said the Fed would start raising rates as long as it
was "reasonably confident" that inflation would move back to the 2%
goal.
"The committee continues to monitor inflation developments
closely," the statement said.
Ben Leubsdorf contributed to this article.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com