By Jon Hilsenrath
WASHINGTON--The Federal Reserve on Wednesday committed to
keeping short-term interest rates near zero at least until midyear
and set the stage for tough debates in the months ahead about
whether to wait even longer.
The Fed "judges that it can be patient in beginning to normalize
the stance of monetary policy," officials said, in the key phrase
of their January policy statement following a two-day policy
meeting that ended Wednesday.
Fed Chairwoman Janet Yellen said in December that the reference
to patience means the central bank isn't likely to raise rates at
its next two policy meetings. By including it Wednesday, the Fed
has taken a rate increase off the table for its March and April
policy meetings, but remained open to a move at the June 16-17
meeting.
The Fed has held its benchmark short-term rate near zero since
December 2008 in an effort to bolster economic growth and lower
unemployment.
Whether June remains a possibility for a rate increase will
depend on how the economy and financial markets behave in the weeks
and months ahead. The Fed's policy statement acknowledged the
complex cross-currents it confronts as it plots a course for later
in the year.
"Economic activity has been expanding at a solid pace," the Fed
said, in an assessment of how the economy has performed since its
December policy meeting.
That marked an upgrade from the "moderate" pace the Fed pointed
to last year.
The economy expanded at a pace in excess of 4.5% in the second
and third quarters last year and many economists estimate it
expanded around a 3% rate in the final three months of the year.
The Commerce Department will release new growth numbers Friday.
Moreover, the Fed noted "strong job gains" and a lower unemployment
rate.
Those judgments pointed to the central bank's confidence about
underlying growth and jobs.
But the statement included a subtle new expression of caution
about inflation, which has run below the Fed's 2% target for 31
straight months. The Fed puts heavy weight on the expectations of
households, businesses and investors for future inflation. It wants
those expectations to remain stable.
In its policy statement the central bank noted market-based
measures of inflation have "declined substantially in recent
months," a signal of some concern about sharply dropping yields in
Treasury Inflation Protected Securities markets which could portend
continued low inflation.
For now the Fed appears unlikely to be alarmed about this
development. Many officials have been putting more weight on survey
measures of expected inflation, such as the University of
Michigan's monthly survey of households. The policy statement noted
that these survey measures "have remained stable."
Ms. Yellen won approval of the statement in a 10-0 vote.
The meeting sets the U.S. central bank on a course for harder
decisions at its March 17-18 policy gathering.
Officials at that time will update their forecasts for economic
output, inflation, unemployment and interest rates. They also need
to decide whether to formally open the door to rate increases in
June by removing or altering the patience language from their
official statement.
They are facing a challenging economic backdrop. Though the
unemployment rate has fallen faster than most Fed officials
expected and growth appears to have picked up, the inflation rate
could fall further because of declining oil prices.
Meantime, while Fed officials contemplate rate increases later
this year, many other global central banks are easing monetary
conditions to combat their own problems with low inflation and slow
growth. The latest example Wednesday was the Monetary Authority of
Singapore, which sought to weaken its currency Wednesday to support
its competitiveness with other Asian economies.
The brewing disconnect between the Fed and other central banks
could unsettle markets and complicate the U.S. central bank's
calculus.
This week completes Ms. Yellen's first year as central bank
chief, one in which she followed through on a plan her predecessor
put in place to wind down the Fed's third bond-buying program aimed
at bolstering the economy after the 2007-09 recession and financial
crisis. The question of when to raise rates is more difficult and
contentious.
Ms. Yellen's judgments could define her tenure as the Fed's
leader. She has taken a more centrist policy view as its chairwoman
than she did as vice chairwoman or as president of the San
Francisco Fed. In those earlier positions, she advocated for
aggressive and sustained easy-money policies. As chairwoman, she
has sought a middle ground with colleagues.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com