The Federal Reserve said it will be patient on the timing of the first interest-rate rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised its assessment of the labor market.

“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee said today in a statement in Washington, removing a calendar-based phrase with language that gives it more flexibility to respond to economic data. “The committee sees this guidance as consistent with its previous statement that” rates are likely to stay near zero for a “considerable time.”

The labor market “improved further,” the Fed said. “Underutilization of labor resources continues to diminish,” it said, dropping the word “gradually” used in its previous statement.

The change in guidance is another step in the Fed’s plan to exit from the loosest monetary policy in its 100-year history. While a faster-than-expected drop in unemployment is pushing the central bank toward raising rates next year, plunging prices of oil and commodities are holding inflation below its target.

Today’s statement didn’t mention global market turmoil sparked by oil and the Russian currency crisis.

Restating language introduced in October, the FOMC said evidence of faster progress toward its goals of full employment and price stability could accelerate the timing of a rate increase, while disappointing figures could delay it.

The Fed repeated it will continue reinvesting proceeds from its bond portfolio until after interest rates start to rise. Three rounds of so-called quantitative easing have swollen the Fed’s balance sheet to a record $4.49 trillion. The central bank stopped purchases at the end of October.

Minneapolis Fed President Narayana Kocherlakota, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher all dissented. Kocherlakota said the decision “created undue downside risk to the credibility of the 2 percent inflation target.”

David Fuller's view

Three Fed officials dissented but I think Janet Yellen’s decision was correct.  She knows the Dollar’s strength - reflected here by the Euro-dominated US Dollar Index (DXY) and the Asia Dollar Index (ADXY) - is now a headwind for US exporters.  Additionally, soft commodity prices should keep inflation in check for up to a year.  Most importantly, much of this year’s job creation and wage increases have come from the US’s booming energy sector which is about to see a shakeout in fracking due to low prices for crude oil.  

Many stock markets have been churning recently, which always tests investors’ nerves.  Nevertheless, short-term indicators are oversold, as you can see from these daily charts for the S&P 500, Nasdaq Composite, Canadian SPTSX, UK’s FTSE 100, Germany’s DAX, Australia’s ASX 200, Japan’s Nikkei-225, India’s BSE Sensex and Hong Kong’s Hang Seng Index. 

Alarm bells should not ring unless we see sustained moves beneath the October lows.  Meanwhile, crude oil prices in the $50 range are probably close to their lows for this rout.  The latter stages of this decline have roiled stock markets, but the net effect remains very positive for the global economy, oil exporters excepted.