Shares on Wall Street slid last night after new Federal Reserve chairman Janet Yellen said interest rates could start to rise about six months after quantitative easing (QE) comes to an end.
Her comments on her first public outing since taking the role undid much of the Federal Open Markets Committee's earlier statement that said it would consider a far broader range of economic indicators than just unemployment before hiking borrowing costs.
It had indicated the committee will consider inflation expectations among other factors.
Asked when the rate-setting committee would start raising rates after QE, Yellen said: "So the language that we use in the statement is 'considerable period'. This is the kind of term it's hard to define but probably means something on the order of around six months, or that type of thing."
On those words, the Dow Jones Industrial Average fell sharply, ending the session down 114 points at 16,222.
Analysts said that suggested, at the current pace of tapering out QE, rates would start to rise in about April 2015.
However, her overall comments were far from those of an out-and-out hawk.
She added: "What the statement is saying is it depends what conditions are like … The new guidance does not indicate any change in the policy intentions of the FOMC, but instead reflects changes in the conditions we face … progress in the labour market has been more rapid than we anticipated … Inflation matters here too.
“If we have a substantial shortfall in inflation, if inflation is persistently running below our two per cent objective, that is a very good reason to hold the funds rate at its present range for longer."
The rapid improvement in the jobless rate in the US has wrongfooted the Fed just as Britain's has caught out the Bank of England and its Governor, Mark Carney, who had to rewrite his own guidance which had been based around a seven per cent unemployment threshold.
Carney set that target last August when unemployment was at 7.8 per cent. It has since plummeted to 7.2 per cent, where figures yesterday showed it had held for a second consecutive month.
Speaking after the Yellen conference, Brian Jacobson, chief portfolio strategist at Wells Fargo Funds Management, said: "The forward guidance is mildly hawkish. Yellen is no dove. She's a pragmatist."
