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March 20, 2014

Federal Reserve clarifies guidance on short-term rates

WASHINGTON — Janet Yellen tried at her first news conference as Federal Reserve chair to clarify a question that’s consumed investors: When will the Fed start raising short-term interest rates from record lows?

Yellen stressed that with the job market still weak, the Fed intends to keep short-term rates near zero for a “considerable” time and would raise them only gradually. And she said the Fed wouldn’t be dictated solely by the unemployment rate, which Yellen feels overstates the health of the job market and the economy.

Those points reinforced a message the Fed delivered in a policy statement after ending a two-day meeting Wednesday. The statement said that even after it raises short-term rates, and even after the job market strengthens and inflation increases, the Fed expects its benchmark short-term rate to stay unusually low.

The statement also said the Fed will cut its monthly long-term bond purchases by $10 billion to $55 billion because it thinks the economy is steadily healing.

But Yellen appeared to jolt investors when she tried to clarify the Fed’s timetable for raising short-term rates. She suggested that the Fed could start six months after it halts its monthly bond purchases, which most economists expect by year’s end. That would mean short-term rates could rise by mid-2015.

A short-term rate increase would elevate borrowing costs and could hurt stock prices. Stocks fell after Yellen’s mention of six months. The Dow Jones industrial average ended the day down more than 100 points.

The Fed’s latest statement said its benchmark short-term rate could stay at a record low “for a considerable time” after its monthly bond purchases end. The Fed has been gradually paring its bond purchases, which have been intended to keep long-term loan rates low.

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