US Fed changes its stance, hints at rate hike

In its last meeting this year, the US Federal Reserve indicated a shift in its stance by removing from its statement its pledge to keep interest rates at zero for “a considerable time”. 

A change in the language, which now says that the Fed will be “patient” on the timing of interest rate increases, does suggest that the recovery is on a surer footing. 

The latest US monetary policy review comes against the backdrop of better than expected unemployment numbers. Non-farm employment has been steadily rising upwards, by 321,000 in November, the biggest gain in the last three years. As a consequence, the unemployment rate has fallen to 5.8 per cent. If the current pace of job creation continues then according to economists, the unemployment rate could fall below 5% in a year.  

Since 2012, the Fed has pledged to keep interest rates at zero for a considerable time. But with the Fed recently concluding its quantitative easing program, a change in the language now suggests that Fed officials are now comfortable with the pace of recovery. But while GDP in the third quarter grew at 3.9 per cent, concerns remain. Wage growth remains muted and inflation is well below the Fed’s 2 per cent target. 

Economists however expect that the fall in unemployment would lead to a tightening of the labour market which would force firms to offer higher wages spurring inflation. The sharp fall in the price of oil while is likely to push inflation even lower, will also spur domestic consumption by putting more cash in the hands of consumers.