Bank sees faster drop in unemployment, lower inflation in 2015 Getty ImagesFed Chairwoman Janet Yellen: “Patient” is the word.The Federal Reserve on Wednesday dropped its promise to keep interest rates close to zero for a “considerable time,” a sign the bank is moving closer to tightening monetary policy for the first time in eight years after an unprecedented attempt to stimulate the U.S. economy. In a new twist, the Fed added fresh language to its statement saying the U.S. central bank can be “patient” before it begins to raise rates. The slightly altered language shows the Fed is still prepared to raise short-term interest rates by the middle of 2015 and perhaps even sooner, especially if the economy continues a strong run that has generated the most new jobs since 1999 and pushed the unemployment rate down to the lowest level in six years. Yet the Fed also finessed its statement, saying its new stance was “consistent” with its “considerable time” pledge.” The bank doesn’t want to cause the kind of turmoil that occurred in mid-2013—the so-called taper tantrum—when the Fed startled markets by suggesting rates could rise in the near future. In keeping with its cautious approach, the Fed once again stressed the timing of its first rate hike since 2006 will depend on the economy maintaining its recent momentum, with any backsliding likely to push a rate increase back even further. Yellen said the patient language all but ruled out an increase in interest rates until April at the earliest. “At this point we think it unlikely that it will be appropriate that we will see conditions for at least the next couple of meetings that will make it appropriate for us to decide to begin normalization,” Yellen said in the news conference after the Fed announced its decision. The bank’s policymakers meet next in late January and again in mid-March. Investors appeared to liked the statement, with the S&P 500 index SPX, +2.04% and the Dow industrials DJIA, +1.69% scoring their best one-day gains of 2014.Economic outlook The Fed’s assessment of the economy was largely upbeat. Yellen noted the U.S. has added an average of 230,000 jobs a month in the past 12 months. The big spurt in hiring has tugged the unemployment rate down to 5.8% from 7% a year earlier—not far from the Fed’s goal for “full employment.” Still, Yellen pointed to an unusually high number of long-term unemployed and people force dto work part-time as evidence the labor market has not healed enough to justify an increase in interest rates in the next few months. Plunging oil prices, for their part, are likely to act as a “tax cut” for American consumers and put “more money into their pockets,” she said. That could give another positive jolt to the economy while keeping inflation low enough to let the Fed nudge rates higher at a more gradual pace. Sinking oil prices also spurred the Fed to slash its forecast for inflation in 2015 to 1% to 1.6%, down from 1.6% to 1.9% in September. Yet the central bank played down the long-term influence of low oil prices on inflation, saying it still expects prices to rise gradually toward its 2% annual target that it considers a sign of good economic health. In other words, Yellen and company don’t expect low oil prices to last. For now, the Fed doesn’t expect slower growth around the world, or financial turmoil in Russia, to significantly impact the U.S. economy. But she said the Fed was closely monitoring economic developments in Russia and elsewhere.Interest-rate forecast There is a broad consensus on the Fed that liftoff will come next year. According to the “dot-plot” projections provided by the Fed, 15 out of 17 top Fed officials think the U.S. central bank will hike rates in 2015. But the Fed lowered its estimates of the pace of rate hikes. The Fed policy committee’s median expectation for the level of the fed funds rate at the end of 2015 is now 1.125%, down 25 basis points from the September meeting. By the end of 2016, the Fed’s median expectation is that rates will rise to 2.5%. That’s down from the prior estimate in September of 2.87%. The decision was controversial at the central bank. There were three dissents, from hawks and doves. On the hawkish side, Dallas Fed President Richard Fisher said economic gains had pushed forward the date when it would be appropriate to hike rates. Philadelphia Fed President Charles Plosser opposed the addition of the word “patient,” urging the bank to drop any reference to a time period in connection with plans to increase interest rates. On the other end of the spectrum, Minneapolis Fed President Narayana Kockerlakota said the decision “created undue risk” to the Fed’s 2% inflation target. marketwatch