(Corrects date to 2015 in paragraph 11)
* Fed drops unemployment threshold for path of interest
* Monthly bond purchases cut by $10 bln as expected
* Fed forecasts suggest more aggressive rate hike path
* Yellen's first news conference rattles markets
By Ann Saphir and Krista Hughes
WASHINGTON, March 19 The U.S. Federal Reserve
will probably end its massive bond-buying program this fall, and
could start raising interest rates around six months later, Fed
Chair Janet Yellen said on Wednesday, in a comment which sent
stocks and bonds tumbling.
Yellen's remarks at her first news conference as the head of
the central bank pointed to a more aggressive path toward higher
interest rates than many had anticipated, and bets in financial
markets shifted accordingly.
The comments came after a two-day meeting in which Fed
officials made another reduction in their bond-buying stimulus
and decided to jettison a set of guideposts they were using to
help the public anticipate when they would finally raise rates.
The Fed said the change in its rate hike guidance did not
mark a shift in its intentions and that it would wait a
"considerable time" after shuttering its asset purchase program
before pushing borrowing costs higher.
Yellen, who had fielded numerous questions without a hitch,
hesitated when asked what the Fed meant by "considerable."
"I -- I, you know, this is the kind of term it's hard to
define, but, you know, it probably means something on the order
of around six months or that type of thing. But, you know, it
depends -- what the statement is saying is it depends what
conditions are like."
Several analysts wondered whether her answer was an
unintended slip, given the deliberately vague language of the
Either way, the reaction in financial markets was swift and
sharp. Prices for U.S. stocks and government bonds added to
earlier losses triggered by fresh Fed forecasts that showed
policymakers are inclined to raise rates a bit more aggressively
than they had been just a few months ago. The U.S. dollar rose.
"The forecast change could be interpreted as a relatively
hawkish shift ... and as such the general market reaction seems
well-founded," said JPMorgan economist Michael Feroli.
Futures traders moved to price in a first interest rate hike
as soon as April 2015. Previously, it was July.
Most top Wall Street economists, however, continued to see
the first rate hike in the second half of 2015, according to a
Yellen sought to use her news conference to emphasize that
rates would stay low for awhile and rise only gradually. She
also said they could end up staying lower than normal "for some
time" even after the jobless rate drops to a healthy level.
The Fed would look not only at how close inflation and
unemployment are to its goals, but how fast, or slowly, those
measures are approaching those goals, she said.
At 6.7 percent, the unemployment is well above the 5.2
percent to 5.6 percent range Fed officials see as in keeping
with full employment. The central bank's favored inflation gauge
is barely more than half of its 2.0 percent target.
The Fed has held interest rates near zero since late 2008
and has pumped more than $3 trillion into the economy with its
bond purchases to try to foster a stronger recovery.
Of the Fed's 16 policymakers, only one believes it will be
appropriate to raise rates this year; 13 expect a first rate
hike next year, and two others see the first rate hike coming in
2016, according to the new forecasts.
But once rate hikes start, Fed officials see slightly
sharper increases than they did in December, when they last
issued forecasts. They now see rates ending 2016 at 2.25
percent, a half percentage point above their December
The unease in markets "might be a sign that people think
Yellen will tighten sooner rather than later," said Wayne
Kaufman, chief market analyst at Rockwell Securities in New
MEASURED WIND DOWN
The central bank proceeded with its well-telegraphed
reductions to its massive bond-buying stimulus, announcing it
would cut its monthly purchases of U.S. Treasuries and
mortgage-backed securities to $55 billion from $65 billion.
The decision to further scale back its stimulus keeps the
Fed on track for the measured wind down laid out by Yellen's
predecessor, Ben Bernanke. The Fed repeated that it plans to
continue trimming the purchases in "measured steps" as long as
labor conditions continue to improve and inflation shows signs
of rising back toward the Fed's 2.0 percent goal.
The Fed's assessment of the U.S. economy chalked up recent
weakness partly to adverse weather.
It had said since December 2012 that it would not consider
raising short-term rates until the jobless rate fell to at least
6.5 percent, as long as inflation looked set to remain
But the unemployment rate has fallen faster than
anticipated, and officials dropped the guidance, saying they
would look at a range of economic indicators to judge the
economy's readiness for higher rates.
Minneapolis Fed President Narayana Kocherlakota dissented,
saying that getting rid of the numerical guidance could hurt the
credibility of the Fed's commitment to return inflation to 2.0
(Reporting by Ann Saphir and Krista Hughes; Additional
reporting by Jason Lange in Washington and Chuck Mikolajczak in
New York; Editing by Tim Ahmann and Andrea Ricci)