US Federal Reserve opens door further for June interest rate hike

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19 Mar2:11 AM

[WASHINGTON] The Federal Reserve on early Thursday morning (Singapore time) opened the door further for an interest rate hike as early as June, ending its pledge to be "patient" in normalizing monetary policy.

But the US central bank signaled a more cautious outlook for US economic growth and slashed its projected interest rate path, in a sign that it remains concerned about the health of the recovery.

In its statement following a two-day meeting, the Fed's policy-setting committee repeated its view that job market conditions had improved and gave its strongest signal to date that it was nearing its first rate hike since 2006.

The statement put a June rate increase on the table, though it also allowed the Fed enough flexibility to move later in the year, stressing that any decision would depend on incoming data. "The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium-term," the Fed said in its statement.

The Fed said a rate increase remained "unlikely" at its April meeting and said its change in rate guidance did not mean the central bank has decided on the timing of a rate hike.

It had previously said it would be patient in considering when to bring monetary policy back to normal.

While the Fed showed that it's nearing a hike, fresh forecasts from the central bank revealed a more cautious view of the economic outlook. The Fed's quarterly summary of economic projections cut its inflation outlook for 2015 and dramatically lowered its projected interest rate path, data known as the Fed's "dot plots." The Fed continued to acknowledge that inflation is running below expectations, weighed down in part by falling energy prices. "Inflation has declined further below the committee's longer-run objective," the Fed said.

Fed Chair Janet Yellen has kept rates at near zero since taking over as head of the central bank in February, 2014, though she has also overseen a steady whittling of loose money promises.

And while Yellen lays the ground for the rate "lift-off,"the Fed continues to grapple with muddy economic data: strong job creation, continued growth, and healthy consumer demand in the United States, but a global collapse in oil prices and a rapid run-up in the dollar that could mean the Fed remains far from its 2 per cent inflation target.

The Fed on Wednesday downgraded its view of economic activity, saying growth has "moderated somewhat," a departure from December, when it cited economic activity expanding at a solid pace.

The federal funds rate has been at its low point since December, 2008. The last time the Fed raised rates was in June, 2006, when a roaring housing market and strong economic growth prompted it to push its target rate to 5.25 per cent.

Investors and economists are split over whether the initial hike will come in June, or in September. Trading in Federal Funds futures contracts point to a September hike, while a recent Reuters poll of 70 economists indicated an even split between June and later in the year.

There were no dissents on the Fed statement.

REUTERS

      

S Fed Reserve announcement: Why investors are anxious to know when interest rates will rise

US Fed Reserve announcement: Why investors are anxious to know when interest rates will rise

PUBLISHED ON MAR 18, 2015 12:06 PM

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A view of the US Federal Reserve on Jan 27, 2015, in Washington, DC. -- PHOTO: AFP

BY GORDON FEENEY

The United States Federal Reserve has kept its main benchmark interest rate at rock bottom levels for more than six years.

On Thursday at 2am Singapore time the Federal Open Market Committee, the Fed's policy-making arm, is expected to offer clues on just when rates will rise after completing its regular two-day meeting.

Borrowing money in the world's largest economy has been ultra-cheap since the depths of the global financial crisis in December 2008, as the Fed worked to get the battered US economy moving again.

Bear in mind that the US recession brought on by vast numbers of mortgage defaults by borrowers who never had the money to repay their banks was the worst in US history since the Great Depression in the 1930s.

And that financial earthquake was felt across the globe.

As it tackled the crisis, the Fed used another weapon in the arsenal of central bankers: effectively printing vast sums of money, a policy known technically as "quantitative easing" where the central bank buys bonds issued by the government.

1. Why do they do this?

The idea is that between very cheap credit and lots of extra money washing around the system, the economy has a good chance of being kickstarted back into action.

Businesses and consumers will be more likely to borrow and spend money - and this creates more jobs and more economic activity.

And indeed, the US economy has improved a lot with unemployment down around 5.5 per cent from over 8 per cent and economic growth coming in at 2.4 per cent last year - with possibly even stronger growth set for this year.

Still, in a mixed picture, some economic data has been less than rosy, leading some analysts to wonder if the Fed needs to hold fire on rate rises.

So what now?

2. Timing is everything

Over recent months, the Fed has made it clear that interest rates will rise at some point. It has already brought an end to its massive money-printing programme.

The crucial question is: exactly when will the Fed raise its benchmark Federal Funds Rate, now at just 0.25 per cent?

Central bankers worry about acting too soon - in this case that raising rates too quickly - will snuff out the nascent US economic recovery.

But they also worry that acting too late could bring other problems - inflated asset prices for instance if ultra-cheap credit gets out of control.

That's where the word "patient" comes in.

In earlier statements the Fed has repeatedly said it will be "patient" in waiting for an economic recovery to take hold before raising rates.

Analysts believe that if the Fed drops this use of the word "patient" in its statement Thursday Singapore time that might well mean rates will rise as early as June.

3. How about the rising US dollar?

Lots of countries around the world are effectively trying to reduce the value of their currencies as a way to make their exports cheaper in foreign markets.

But the US dollar has been rising very strongly for months now, which of course makes US exports more expensive in foreign markets.

That's important because in recent times, a significant number of factories have moved back to the US after its manufacturing sector took a hammering as a result of cheaper centres such as China.

One factor the Fed will probably be weighing up is that higher interest rates will tend to cause the US dollar to move even higher.

4. Why would anyone in Singapore care about the Fed's decision?

Anyone with a mortgage or savings account in Singapore knows that interest rates have been rock bottom for some years here too.

But in recent months, rates have started to rise. In Singapore, it's not the central bank that sets intesest rates directly, but rather the banks.

Many home owners here have mortgages linked to a fluctuating interest rate. One of the most common is the Singapore Interbank Offered Rate (Sibor) - which is basically the rate at which banks lend money to each other.

So if the Sibor goes up, a borrower with a mortgage pegged to Sibor will face higher rates.

The complex interweaving of global currencies, interest rates and economic activity is hard to grasp - even for the experts.

But broadly speaking, if interest rates rise in the United States that might lead to higher borrowing costs for banks here - and therefore to higher mortgages for Singapore borrowers down the track.

5. The US Fed is going in the opposite direction of many central banks

Just as the Fed contemplates a rise in US interest rates, plenty of central banks around the globe are doing just the opposite - cutting rates and using the same kind of "quantitative easing" as the US used in recent years.

The European Central Bank has done both. The Reserve Bank of Australia, Bank Indonesia and the Reserve Bank of India are just a few of those to raise rates recently.

Analysts worry about this sort of imbalance - with the US apparently coming out of recovery, and looking to making borrowing costs higher, but with many other economies doing precisely the opposite.

gordon@sph.com.sg

INTERNATIONAL

MOHD FYROL / AFP / GETTY IMAGES

Fake report of former Singapore PM's death prompts police complaint

Lee Kuan Yew has been receiving treatment for severe pneumonia in an intensive care unit since Feb. 5

March 18, 2015 10:37AM ET

Reports of the death of Singapore’s founding father and first Prime Minister Lee Kuan Yew have proved premature, prompting the country’s prime minister’s office to file a police complaint over a fake website that carried the news.

Lee, who is 91 and has been receiving treatment for severe pneumonia in the intensive care unit at Singapore General Hospital since Feb. 5, is “critically ill” and his condition is worsening further while on life support in the hospital, the government said Wednesday.

But an apparently fake website — which displayed the logo of the prime minister’s office — carried news of his demise, prompting both CNN and China’s CCTV to incorrectly report that Lee had died, Singapore’s  Straits Times reported. Both later retracted the breaking news tweets, the newspaper added.

Lee, widely credited with transforming Singapore from an economic backwater into one of Asia's wealthiest economies, has been breathing with the help of "mechanical ventilation," a form of life support, according to previous government statements.

Under Lee and his successors, including his son, current Prime Minister Lee Hsien Loong, Singapore — known for its ban on chewing gum sales and canings for crimes some countries would rule as minor — has strictly controlled public speech and assembly, though it has become more socially liberal and allowed greater artistic freedom in recent years.

Lee commands immense respect among Singaporeans, who this year will celebrate the former British colony’s 50th independence anniversary.

Lee has visibly slowed since his wife of 63 years, Kwa Geok Choo, died in 2010. In a book published in 2013, the Asian elder statesman said he felt weaker by the day and wanted a quick death.

Prime Minister Lee posted the latest update on his father on his Facebook page and was immediately inundated with expressions of support, prayers and wishes for the patriarch's recovery.

Many said they hoped he would live long enough to witness Singapore's 50th anniversary of independence on Aug. 9, an event locally called "SG50." The country gained self-rule from Britain in 1959 and became a republic in 1965, after a brief and stormy union with neighboring Malaysia. 

Al Jazeera and wire services