Federal Reserve remains patient about next U.S. rate hike

The U.S. Federal Reserve has reiterated its pledge to be patient and hold off on raising interest rates from the record low levels they’ve been at for the last six years.

"Based on its current assessment, the [Fed] judges that it can be patient in beginning to normalize the stance of monetary policy," said a statement released Wednesday afternoon by chair Janet Yellen and her colleagues. It contained no hint of a big change in Fed policy, but there was an added note of concern about low inflation.

In the statement, the Fed noted that inflation remains well below its two per cent target and says the factors holding down inflation have intensified since its last meeting in December.

"The change in wording on inflation is significant," said David Jones, chief economist at DMJ Advisors. "Given their concern about inflation being as low it is, it is more of a question of a hike at mid-year or the third quarter rather than one coming any earlier than that."

Inflation has stayed low in part due to the plunge in energy prices and a steadily strengthening American dollar.

The Fed forecasts that U.S. inflation will likely decline further before starting to rise gradually.

Its statement also noted that the pace of U.S. economic growth was solid. That suggests that the Fed is still on track to raise its key interest rate later this year.

U.S. stocks fell sharply on that. Both the Dow Jones industrial average and the S&P 500 fell more than one per cent.

Rate hikes not expected til mid-year or later

The U.S. federal funds rate remains at the zero to 0.25 per cent target range. Many market watchers expect the Fed to begin hiking its key rate around mid-year. But some economists have recently pushed back their estimates of when the Fed will next move to later 2015 or even into 2016.

Several other central banks, including those in Canada and the EU, have either cut rates or announced stimulus programs in recent weeks.  

"Markets have been gradually losing confidence in the prospects for higher U.S. policy rates this year, with short-rate futures scarcely pricing in a single [quarter of a percentage point] rate hike by the end of this year," said a commentary from RBC Capital Markets, issued before the Fed announcement.