Stocks rallied on Wednesday after the Federal Reserve cut its expected pace of growth and inflation, suggesting a less aggressive timeline for raising interest rates even as it opened the door for the first rate hike in almost a decade.
In a statement following a two-day meeting, the Fed dropped its pledge to be "patient" in deciding when to begin raising rates, moving a step closer toward hiking rates, but made it clear that it needs to see more gains in the labor market and price growth to raise rates.
While the statement put a June rate increase on the table, it also allowed the Fed enough flexibility to move later in the year, stressing that any decision would depend on incoming data.
A majority of Wall Street's top banks now see the Federal Reserve holding off until at least September before raising interest rates.
Just two weeks ago, the top economists for this group had been centered around June as the likely date for the Fed to finally end the near-zero rate policy. The shift brings these economists into closer alignment with the bond market's view for when the Fed will make its move.
Twelve of 16 U.S. primary dealers that do business directly with the Fed said on Wednesday they see a rate liftoff in September or later. Just four of those responding to a Reuters poll stuck with June as their forecast.
"By eliminating 'patient' from its guidance it removed an artificial stricture on its flexibility, creating room for the data to dictate its future actions," said David Joy, chief market strategist at Ameriprise Financial in Boston.
"At the same time, by lowering its expectations for the pace at which rates will rise, it sent a clear signal that it is in no hurry to push rates higher as it views the economy as growing only moderately."
'ELUSIVE PROGRESS'
While the turn in language opens the door to an initial rate hike as early as June, the uncertain path of the global economy remains a dilemma for central bank officials who say they want more confidence in the U.S. recovery and the eventual rise of inflation before committing to a rate "lift-off."
The economic data, however, have been muddy - strong job creation, continued growth, and generally 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 percent inflation target.
U.S. crude prices remained mired in the low $40 dollar a barrel range on Tuesday, and the Organization of Petroleum Exporting Countries acknowledged it may be the end of this year before low prices prompt higher-cost producers in the United States and elsewhere to trim supply.
Progress toward the Fed's inflation goal may be elusive until the price of oil finds a bottom and stabilizes.
A dollar that has soared more than 20 percent against major currencies over the past year also means imported goods are cheaper, while U.S. exports may be nicked, dragging down growth.
Ultimately, Fed officials say they are not concerned about either trend. Low oil prices have put what the IHS Global Insight consulting firm estimates to be around $2,000 into the pockets of the average American family - money that can support consumer demand and add to gross domestic product.
Fed officials also regard the dollar's appreciation as a vote of the world's confidence in the U.S. economic recovery, as investment flows towards what is now one of the few global bright spots.
"The stronger dollar is not going to be a decisive factor in the Fed's thinking," Capital Economics chief global economist Julian Jessup wrote last week. "The U.S. recovery is robust enough to weather a firmer currency."
'A COIN FLIP'
But the rising dollar and other economic data will partly determine whether the Fed opts for June, September or another date in what is now becoming a meeting-by-meeting debate over when to raise rates.
Between strong U.S. monthly job creation and steady economic growth, the Fed's near-zero interest rate stance has seemed increasingly anachronistic, according to a growing group of Fed officials, economists and analysts who follow the central bank.
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 growth prompted it to push its target rate to 5.25 percent.
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.
'LEAK INQUIRY CONTINUES'
The U.S. central bank's internal watchdog is probing an alleged leak of confidential information from a 2012 meeting, Federal Reserve Chair Janet Yellen confirmed on Wednesday in her first public comments on the matter.
In early October 2012, Medley Global Advisors told its clients the details of a key Fed meeting a day before the Fed released its own record of the discussion.
At the policy-setting meeting, Fed officials laid the groundwork for the massive bond-buying stimulus they were to roll out later that year. Early knowledge of that discussion could have given some traders an unfair edge.
"It has been reported that our inspector general is engaged in a review at this time of this matter," Yellen said at a news conference following the two-day policy-setting meeting. She declined to give details, but said she would welcome the review's conclusions and would cooperate with members of Congress requesting further information about the incident.
Representative Jeb Hensarling, a Republican who is chairman of the House of Representatives Financial Services Committee, said in a letter to Yellen that there is an open criminal investigation into the matter. In the letter he also said that the Fed's initial internal inquiry was dropped "at the request of several members of the FOMC," as the Fed's policy-setting Federal Open Market Committee is known.
Yellen on Wednesday said she believes that allegation is untrue. "I don't know where that piece of information could possibly have come from," she said.
The probe comes as politicians including Hensarling boost pressure on the Fed to tell the public more about its inner workings, including its decisions about monetary policy.
Yellen on Wednesday reiterated her view that opening the Fed's inner discussions to public scrutiny too soon after the fact would result in worse outcomes for the economy.
The Fed currently releases minutes of its policy meetings three weeks after the date of its policy decision.
