Asian and European stocks are under selling pressure and U.S. stock futures are lower for Thursday after U.S. Fed Chairwoman Janet Yellen admitted yesterday that U.S. benchmark interest rates could rise sooner in 2015 than most investors were expecting.
When responding to questions at the Fed’s press conference about interest rate hikes, Yellen said that the Fed’s 6.5 percent unemployment threshold was ending and would be replaced with “qualitative guidance” that the central bank would consider beyond simply the unemployment rate.
Yellen explained that the Fed would keep interest rates low for a “considerable time” after quantitative easing ends at the end of 2014.
Yellen was questioned about the length of time between the end of quantitative easing in 2014 and the first rate hike.
She replied, “It’s hard to define but, you know, probably means something on the order of around six months.”
Based on Yellen’s “six month timetable”, the first rate hike will arrive in mid-spring around April 2015, although most investors were projecting late 2015 or 2016.
The Fed announced in its statement that it will strive for maximum employment and 2 percent inflation before any rate change while acknowledging that “economic conditions” may keep the federal funds rate below the normal level for some time.
“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
The Fed said it will taper its monthly QE bond buying program by another $10 billion, to $55 billion a month beginning in April.
The Fed is projecting a slightly lower GDP for 2014 compared to their last projection from December.
These calculations are based from the fourth quarter of last year to the fourth quarter of this year.
Change in real GDP is projected to be 2.8 to 3.0 percent in 2014, down from their earlier projection of 2.8 to 3.2 percent in December.
Meanwhile, the unemployment rate is projected to fall further compared to their earlier projection in December.
Unemployment is expected to fall in the range of 6.1 to 6.3 percent compared to December’s projection of 6.3 to 6.6 percent.