BUSINESS

Fed formalises its inflation target at 2 pc, not to raise US interest rates until late 2014

The Federal Reserve has said on Wednesday it does not now expect to raise interest rates in the US until late 2014, BBC informs. The surprise move sent the dollar sharply lower in markets, and caused US government borrowing costs to fall.

In its regular policy statement, the central bank said it saw “significant downside risks” to the economy, and said inflation had fallen back to a level in line with its mandate. Rates remain in a target range of zero to 0.25%.

Along with its usual economic forecasts, the Fed decided to publish the interest rate forecasts of individual committee members for the first time. The Fed did not announce any new quantitative easing measures – pumping newly created money into the financial system by buying up US government debt and other assets. However, it repeated a concern expressed in previous statements that the US economy faced “significant downside risks” and that it “expects to maintain a highly accommodative stance for monetary policy”. The Fed cut its growth forecast for the current year slightly, to a range of 2.2-2.7%, from 2.5-2.9% previously.

Unlike in previous statements, the Fed also no longer said it was monitoring inflation closely, reinforcing the impression that price rises were no longer a major concern. The Fed also for­malised its inflation target at 2% – similar to the Bank of England’s. Previously the central bank did not set itself a formal target, but pointed to a range of 1.7% to 2% as an informal target.

Core inflation – a measure of long-term inflation trends – has fallen back towards 2% in recent months. Consumer prices inflation hit a high of 3.9% last September. However, the Fed’s new inflation target is based on the broader personal consumption expenditure (PCE) index.

The interest rate announcement caught markets by surprise. They had been expecting rates to start rising from mid-2014, instead of the late 2014 forecast by the Fed. The dollar fell, as the lower expected interest rates made the currency a slightly less attractive place to keep cash.

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