The Federal Reserve vowed Wednesday to hold a key interest rate near zero, but despite the central bank showing confidence in U.S. job growth, the financial markets fell after oil prices dropped to their lowest level in nearly six years. Analysts interpreted the Fed's statement as meaning there won't be an interest rate hike before June.
UPDATED 4 p.m. EST:
The Dow Jones Industrial Average, which measures the share prices of 30 large industrial companies, dropped 195.84 points, or 1.13 percent, to close at 17,191.37; the S&P 500 stock index lost 27.39 points, or 1.35 percent, to end at 2,002.16. The Nasdaq Composite declined 43.50 points, or 0.93 percent, to finish at 4,637.99.
Based on the Fed’s current assessment, the Federal Open Market Committee (FOMC) said it will be “patient” on raising interest rates from the historic lows where they have been for months. That's the same wording the central bank used in its December statement. The Fed also said the U.S. economy is strengthening.
“Labor market conditions have improved further, with strong job gains and a lower unemployment rate,” the central bank said in the statement Wednesday.
The Fed expects inflation will decline further in the near term but also anticipates inflation will rise gradually toward the central bank’s 2 percent target over the medium term as the labor market continues to improve and as the “transitory effects of lower energy prices and other factors dissipate.”
But the Fed warned that inflation has continued to decline below the central bank’s target, largely due to the declines in energy prices.
“That language is widely interpreted as meaning that the Fed won't begin to hike rates from near zero for at least another two FOMC meetings,” Paul Ashworth, chief economist at London-based Capital Economics, said in a research note Wednesday. Most economists don’t expect the Fed to hike rates before June.
Meantime, U.S. crude oil prices tumbled to a session low of $44.08 per barrel, the lowest since April 2009. Separately, U.S. commercial crude oil inventories rose by 8.9 million barrels from the previous week, the U.S. Energy Information Administration said Wednesday. At 406.7 million barrels, U.S. crude oil inventories have surged to the highest seasonal level in at least 80 years.
Meanwhile, Brent crude, the benchmark for global oil prices, declined 2.34 percent Wednesday to $48.44 per barrel on the London ICE Futures Exchange. Since June, Brent crude's price has dropped more than 40 percent.
Falling crude oil prices have pulled down retail gasoline prices in the U.S. Since last year the average U.S. retail gasoline price is down $1.28 per gallon from $2.04 per gallon, according to Gasbuddy.com. The Fed said U.S. household spending is “rising moderately” and that the recent declines in energy prices have “boosted household purchasing power.”
“Changes to the wording of the statement suggest that the FOMC is still taking the view that the collapse in oil prices is a net positive for the real economy,” Ashworth said.
The Fed cautioned earlier this month in its “Beige Book,” a report the central bank publishes eight times a year, that plunging oil prices since June are beginning to show harmful effects in U.S. regions that are dependent upon the energy industry, causing oil firms to report reducing staff or at least freeze hiring.
“It all depends on the strength of real economic growth and how fast the unemployment rate falls,” Ashworth said. “We are optimistic on that front and, consequently, still expect the Fed to start raising rates in June.
Economists are now anticipating the minutes from the Federal Reserve's Jan. 27-28 meeting that are scheduled for release on Feb. 19. Analysts will evaluate those minutes for clues as to when the Fed could begin to raise rates.
The Fed’s next policy meeting will take place March 17-18, followed by a press conference from Federal Reserve Chair Janet Yellen.