The Federal Reserve said Wednesday that it plans to keep short-term interest rates low for a "considerable" time after it ends a bond purchase program aimed at stimulating the economy. But the central bank also signaled that it is increasingly focused on normalizing monetary policy as the recovery strengthens.
Winding up a two-day meeting, the Federal Open Market Committee said the economy is growing at a "moderate" pace, a slightly more positive outlook than its last policy statement in July. At the same time, the panel noted that weakness in the job market shows "there remains significant underutilization of labor resources."
"The tone of the Fed's latest policy statement was decidedly dovish," said Paul Edelstein, director of financial economics with IHS. "There was some hesitancy over current conditions and the forward guidance was left intact. However, this was not enough to alter the general course of monetary policy."
Stocks wobbled immediately after the FOMC's policy statement, but quickly ticked up. As of 3:36 p.m. ET, the Dow Jones industrial average was up 29 points, to 17,161, with the S&P 500 and Nasdaq composite index also inching up.
The Fed continued to "taper" its monthly purchase of Treasury and mortgage bonds, cutting them by $10 billion, from $25 billion to $15 billion, for a seventh consecutive month. The program, adopted during the financial crisis to help keep interest rates low and support economic growth, is scheduled to end in October.
"As the economy has continued to gain traction, the FOMC has dialed back on its asset purchases in the beginning stages of a normalization of monetary policy," said Stuart Hoffman, chief economist with PNC Financial Services Group, in a research note.
Jim O'Sullivan, chief U.S. economist with High Frequency Economics, said in a client note that Fed officials are in no rush to hike interest rates. But he warned that financial markets may be underestimating how quickly the Fed intends to tighten policy over the next several years as the economy gains speed.
The Fed now expects its benchmark federal funds rate to reach a median 1.35 percent by year's end, up from the bank's June estimate of 1.13 percent. It raised its median funds rate forecast to 2.85 percent by the end of 2016, up from 2.5 percent in June. By year-end 2017, the funds rate is expected to reach 3.75 percent.
Fed policymakers are weighing how long to keep interest rates near zero. The bank's "doves," led by Fed Chair Janet Yellen, have argued that it is premature to raise rates so long as the economy remains slack. By contrast, Fed "hawks" have raised concerns that the loose monetary conditions could trigger inflation and that the policy hurts savers.
Philadelphia Fed Bank president Charles Plosser and Dallas Fed chief Richard Fisher, both noted hawks, dissented from the FOMC statement, which was approved 8-2. Fisher thinks the economy is improving faster than indicated in the panel's policy statement, and also warned against "continued signs of financial market excess." Plosser objected to the FOMC's pledge to keep interest rates low for a considerable time after the bond purchase program ends, arguing that such a commitment doesn't reflect how quickly the economy is rebounding.
In a news conference following the release of the policy statement, Yellen emphasized that any move by the Fed to raise expectations for higher interest rates would depend on how the economy performs.
"If the pace of progress in achieving our goals were to quicken... it's likely that the committee would begin raising its target for the federal funds rate sooner than is now anticipated, and might raise rates at a faster pace," she said.
The FOMC said the economy is benefiting from rising household spending and investment by businesses. But the housing market is recovering slowly, while fiscal policy is "restraining growth," the panel said. Inflation remains below the 2 percent target the Fed sees as healthy.