Fed nods to global troubles, while keeping faith in U.S.

By Reuters

Jan 29, 2015 04:50 AM EST

For months now Federal Reserve policymakers have watched the economic turmoil overseas, from Ebola to Russia to the ongoing travails of the euro, and largely held their tongue.

On Wednesday the weight of those overseas concerns broke into the Fed's policy statement, when it included "international developments" in the list of things it would monitor in assessing when to raise interest rates.

That's the first time since January 2013 that an overt reference to overseas economic events has warranted a nod from the Federal Open Market Committee, and some traders took it as a sign the Fed was likely to delay well into the fall its first interest rate hike since 2006.

Bond yields fell even though the Fed vouched its faith in the "solid pace" of U.S. economic growth.

"Some members are concerned that a stronger dollar and poor growth overseas might slow growth in the U.S. If that appears to be happening, they might delay the increase in the Fed funds rate," said Jim Kochan, chief fixed-income strategist at Wells Fargo Funds Management in Wisconsin.

Wednesday's reference to the world economy was not as strong as the language the Fed used through much of 2012. The risk of a break up of the euro zone led the central bank to repeatedly warn then that "strains in global financial markets continue to pose significant downside risks to the economic outlook." That phrase disappeared in January, 2013, as the threat of a euro crack-up receded.

There was no such reference to overseas risks in the Wednesday statement. Rather, the Fed simply added "international developments" to a laundry list of things it would consider in making its interest rate decision.

Given what has transpired in recent weeks that is perhaps the least policymakers could have done: a host of global central banks have cut rates, and the European Central Bank launched a massive stimulus program.

On balance, many economists viewed the international reference as a sidelight to a statement that otherwise reflected faith in the U.S. recovery.

"The balance of the communiqué was modestly more hawkish," Gennadiy Goldberg, U.S. strategist at TD Securities in New York, wrote in an analysis after the Fed statement. "While 'international' developments will remain a key source of concern for the Fed going forward, they could have more impact on how far the Fed takes rates off the zero bound rather than how long they should wait before acting."

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