The United States Federal Reserve has dropped its pledge to be “patient” before raising interest rates, freeing its hand to lift official borrowing costs for the first time in nearly a decade.

The central bank scrapped its low-rates guidance and said it would start lifting rates once it became reasonably confident that inflation is heading back to its 2 per cent target – ruling out a move as soon as April but opening up its options from June onwards.

However, the central bank also reduced its forecasts for growth and inflation and projected a shallower path for interest-rate increases, suggesting the central bank will tread cautiously as the dollar weighs on exports and inflation.

Janet Yellen, the Fed chairwoman, said that it was important that the central bank not allow itself to get behind the curve on rates policy, but she added that the removal of the “patience” pledge did not mean the central bank was “impatient” when it came to rate hikes.

Market reaction

The biggest market reaction following the statement was seen in US equities, where the broad S&P 500 index erased losses to rise 1 per cent amid speculation that the Fed is now more likely to hold fire in June.

Investors bought up US treasuries, pushing yields on the benchmark 10-year note six basis points lower and back below 2 per cent.

The dollar weakened, with the euro jumping as much as 1 per cent against the US dollar to trade at $1.068.

The decision came in the most hotly anticipated Fed meeting since Ms Yellen took the chair of the central bank more than a year ago.

The dollar has been trading at multiyear highs against a range of currencies, partly in anticipation of higher borrowing costs in the US following over six years of near-zero rates, but also as some two dozen other central banks have eased policy this year.

The Federal Open Market Committee noted that export growth had “weakened”, as it acknowledged the dollar’s influence.

Freer hand to change rates

Ms Yellen on February 24th paved the way for the “patience” pledge to be ditched, as she sought to give the committee a freer hand to change rates when it saw fit.

In a new test, the central bank said it anticipated lifting rates when it had seen further improvement in the labour market and was “reasonably confident” that inflation would move back to its 2 per cent target over the medium term. – (Copyright the Financial Times Limited 2015)