2nd LD Writethru: U.S. Fed drops "patient" pledge, setting stage for rate hike

The U.S. Federal Reserve on Wednesday dropped its pledge to be "patient" in beginning to raise interest rates, setting the stage for lifting benchmark borrowing costs later this year.

The Fed said it will "be appropriate" to raise interest rates when it has seen "further improvement" in the labor market and is "reasonably confident" that inflation will move back to its target of 2 percent over the medium term, dropping the word "patient" from its policy statement after a two-day meeting of its Federal Open Market Committee (FOMC), the Fed's chief body for monetary policy.

Fed Chair Janet Yellen had explained that "patient" meant that the Fed wouldn't raise interest rates at its next two policy meetings. The central bank adopted the phrase in December and repeated it in January, which means the Fed would not raise interest rates at its policy meetings in March and April.

By dropping the patient assurance, the Fed has opened a door to interest rate hike as soon as June, as the central bank said clearly in the statement it's unlikely to do so in April. The Fed has kept its benchmark short-term interest rates near zero since late 2008.

But Fed downgraded its forecast for U.S. economic growth and inflation rates for this year in its quarterly economic projections, indicating it's not in a hurry to raise interest rates.

The central bank expected the U.S. economy to expand at 2.3 percent to 2.7 percent this year, lower than 2.6 percent to 3.0 percent it projected in December. It estimated U.S. inflation to stay between 0.6 percent and 0.8 percent in 2015, down from 1.0 percent to 1.6 percent which was previously projected.

The Fed also revised down its projection of the long-run normal unemployment rate, which is consistent with full employment, to between 5.0 percent and 5.2 percent, suggesting underlying slack remains in the labor market.

Analysts said the Fed could afford to be patient in deciding when to raise interest rates as labor force participation rate was lower than expected and wage growth remained sluggish, although the unemployment rate had fallen to an almost seven-year low of 5. 5 percent in February.

Most economists expect the Fed to start raising interest rates in June or September, according to a Wall Street Journal survey conducted early this month. Endite