NEW YORK ( TheStreet) --Investors got an early Christmas present Wednesday when the Federal Reserve maintained its pledge -- in slightly different wording -- to keep interest rates low.
The central bank's policy statement kept the phrase "considerable period" when describing its rate outlook but added a new phrase: that it could afford to be "patient" when deciding on rate hikes. After some initial confusion, the markets decided that this was all good news.
"This new language does not represent a change in our policy intentions," Federal Reserve chairman Janet Yellen assured reporters in her press conference.
Stocks, which already were rallying before the Fed statement, spiked even higher afterward.
Although expectations are that the Fed won't raise rates before June 2015, Yellen hinted that a rate hike could actually come sooner. During her press conference, the chairman said that the Fed wouldn't make any changes for "at least the next couple of meetings," a suggestion that a move could come before June.
The Fed meeting came at a critical time for global markets. Oil prices have collapsed, the Russian economy is in a death spiral and financial markets are clearly worried about the fallout from both.
As recently as last week, analysts had said language about "patience" might replace the "considerable time" wording, pointing to rate hikes sooner. The central bank followed that path when it last began raising rates in 2004.
"The Committee judges that it can be patient in beginning to normalize the stance of monetary policy," said the statement released on behalf of the Fed's Open Market Committee. "The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's two percent longer-run goal."
The events of the last week clarified the real challenge the Fed confronts: As the world's economic superpower, the increasingly-healthy $17 trillion U.S. economy needs to lend a hand to the rest of the world's $55 trillion economy.
With Russia spiraling, Japan in recession, China's growth rate down 30% this year (7% rather than 10%), Europe on the cusp of lapsing into a triple-dip downturn, and once-thriving Brazil coming off two quarters of negative growth, the sheer size of the economies at risk proved impossible to ignore.
"It's hard to see why the Fed would add to the volatility," said Lindsey Piegza, chief economist at Sterne Agee in Chicago. "How long can the U.S. pretend it's not affected by the rest of the developed world falling into recession or to near-zero growth?''
Add them up, and the yearly output of economies that are clearly troubled is at least $35 trillion, even leaving out slow-growth economies from the United Kingdom to Canada, as well as most of the developing world and the Mideast's oil belt. Almost as much as U.S. home buyers, they need ready access to cheap credit to dig themselves out of holes they have dug, from over-reliance on oil in Russia to domestic spending in Saudi Arabia and deflation in Japan.
On the other hand, ignoring economic pain in the rest of the world is something the Fed often does, Moody's Analytics economist Ryan Sweet said before the statement was made public. Its mandates are to worry about full employment and low inflation in the U.S., he said. Independent economist Joel Naroff agreed, adding that higher U.S. rates would bolster the dollar and help Japan and Europe send the U.S. more exports.
"They'll make it up in Toyotas,'' Naroff said. "Nothing is better for the world than a strong and stable - and I emphasize stable - U.S. economy."
But in an era where pressures on nation-states are more often commercial than military, Piegza said the Fed is something like the North Atlantic Treaty Organization (NATO) during the Cold War - the giant American-dominated institution that protects Europe from chaos.
And the Fed had plenty of flexibility to stand pat, because inflation fueled by the near-zero interest rates the central bank implemented beginning in 2008 is basically no threat at all in the U.S.
For the last year, the inflation measure the Fed relies upon rose by 1.48%, well below the central bank's 2% inflation target. With the price of oil down almost 45% since July, there's little chance of a sharp rebound: Producer prices for goods fell 0.7% in November, with more than half coming from falling gasoline prices. Core consumer inflation is also negative, at least once shelter is taken out of the calculation.
The Fed is under no real pressure from wages, rising asset prices, or any other domestic overheating, Piegza said. (Naroff counters that the push cheaper gas will give consumer spending is likely to produce 3.5% annualized growth in consumer spending the next couple of quarters, which he said will accelerate wage pressures.)
Even with two strong quarters since March, the U.S. economy will only grow a little more than 2% this year, Piegza added. Sales at home builders like Toll Bros. (TOL) and D.R. Horton (DHI) are still sluggish, and no one yet knows what problems oil producers like Exxon Mobil (XOM) and Chevron may soon have.
As Naroff argues, maybe the impact of cheap gasoline will drive a fourth quarter and early 2015 so strong that the Fed will raise interest rates as soon as next May. Ameriprise Financial research vice president Brian Erickson adds that if the market gets nervous about too-strong growth, it could push rates up faster than the Fed wants. But since that data isn't yet in hand, the Fed's gesture of conciliation to trading partners was a logical move.