Get ready for the Federal Reserve to raise interest rates.
The Fed dropped the key word “patient” from its statement Wednesday, signaling that it could increase interest rates in June for the first time in nine years.
The stock market surged on the news. The Dow was falling over 100 points before the Fed statement and immediately jumped. It ended the day up 227 points.
Why the big boost? The central bank said that action is “unlikely at the April meeting.” It also gave a lot of signals that it will only raise rates if the economy remains healthy, which investors interpret to mean that the initial increase is likely to be small.
What it means: The statement today gives the Fed more options on when it wants to raise interest rates.
“This change does not mean that an increase will necessarily occur in June, although we can’t rule that out,” Fed Chair Janet Yellen said at a press conference Wednesday afternoon.
The Fed put rates near zero in 2008 during the financial crisis and they haven’t budged since. A rate hike would be the Fed’s biggest vote of confidence that the U.S. economy has recovered.
What’s next: The key factors the Fed will be watching as it decides when to raise rates are hiring, inflation, economic growth and the increasingly valuable — perhaps too valuable — U.S. dollar.
“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective,” the Fed wrote Wednesday.
America’s economy continues to outperform its peers around the world. The Fed’s likely rate increase this year stands in contrast to many other central banks, including Europe’s, which are lowering their interest rates to try to boost growth.
U.S. unemployment is at its lowest rate since 2008, gas prices and inflation remain low, and growth is chugging along at 2.4%. The Fed forecasts an even bigger economic expansion this year.
The headwinds: The major sticking point is wages. Many believe wage growth, which has been nonexistent, is around the corner, but Yellen continues to mention wages as one of her top concerns. They are only going up 2% a year, much slower than the 3.5% target.
Beyond the economy, a new dilemma will likely complicate the Fed’s decision: the U.S. dollar.
Some fear the dollar is becoming too strong. It’s almost equal to the euro for the first time in over a decade.
It’s great news for Americans traveling to Europe, but it’s bad for some of America’s biggest employers with operations abroad. Many U.S. businesses, including Coca-Cola and Oracle, are hurt by the dollar’s rise. Their products are more expensive, and less attractive, to foreign buyers.
“What’s important about this part of the statement is that it clearly says the FOMC is looking for ‘further’ improvement, meaning the economy and labor market has not yet met whatever criteria necessary to warrant a rate hike,” says Dan Greenhaus, chief strategist at BTIG.
But overall, the Fed sounded optimistic about the economic outlook for the U.S.
“It’s important to note this is not a weak forecast,” Yellen said. “We are projecting good performance for the economy. “