The Federal Reserve has run out of patience. Since December, the Federal Open Market Committee’s statement following each meeting has included the phrase “the committee judges that it can be patient in beginning to normalize the stance of monetary policy” (emphasis added).  

On March 18, the FOMC’s guidance changed to eliminate any suggestion of continued patience.

The removal of the “patient” language was widely expected. When it was first added, Chairwoman Janet Yellen said it was meant to signify that “the committee considers it unlikely to begin the normalization process for at least the next couple of meetings.” 

In her February 2015 testimony, Yellen repeated the pledge to give at least a couple of meetings’ notice before raising rates. 

So, what we know for sure is that the two-meeting buffer is gone. 

Starting with its June 2015 meeting, the Fed will be free to begin to raise rates whenever it believes conditions warrant.

But as to when rates might rise, while being appropriately noncommittal, the clear message was that the Fed’s view of inflation will be the dominant factor.

Yes, employment levels will continue to matter, but the Fed was clear that it fully expects continued improvement in the labor market. 

Indeed, according to the Fed itself, the odds still favor a rate increase in 2015. 

Nearly all committee members predict that rates will rise this year, to 0.625 percent by year’s end (down from a forecast 1.125 percent as of the committee’s December meeting). But the FOMC also made clear that it will not act until it “is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

And the Fed is much less confident about the prospects for gross domestic product growth and inflation than it was in December. It still views the plunge in energy prices as “transitory”, but the Fed’s current forecast for 2015 GDP growth is 2.3 to 2.7 percent, and for inflation only 0.6 to 0.8 percent, both well down from earlier forecasts.

Initial reactions to the Fed’s more subdued economic outlook were universally positive. U.S. bond and stock markets both rallied and the dollar weakened against the euro. Given the dose of medicine delivered by the Fed by ending its commitment to patience, that’s a fairly remarkable outcome. 

But in the days and weeks to come, a great deal is riding on inflation expectations. If the downturn in energy prices is short-lived, expect the Fed to act more quickly. If U.S. economic growth slows to match the rest of the world’s developed markets, the holding pattern may continue for some time. As Yellen said in the press conference following the meeting, the Fed is no longer patient, but neither is it impatient.  

Typically, the Fed raises rates to dampen growth when inflation has surpassed its 2 percent target. But we are not living in normal times. The federal funds rate is at historic lows, and the Fed’s balance sheet is still swollen from the days of quantitative easing. Given that backdrop, we would expect a move to normalize rates long before the economy begins to heat up.

Though we cannot know the exact timing, we believe that the days of ultralow short-term rates are numbered. Higher rates are not costless – certainly not to borrowers, including the U.S. government.  

But there is also an economic cost when returns to debt providers (which includes most retirement savers as well as many of our nation’s largest financial institutions) are suppressed. We view even this small step toward normalcy as a sign of a strengthening economy and a harbinger of enhanced future growth.