The U.S. Federal Reserve has left its key benchmark interest rate unchanged, but altered its language regarding a rate hike, saying it will be "patient" in determining when to raise rates.

For the past six months, the Fed has said it plans to keep a key interest rate near zero for a "considerable time" after the end of quantitative easing, the bond-buying program it began several years ago to stimulate the economy.

In its rate announcement today, the Fed open market committee maintained the phrase “considerable time” in its minutes, but warned it could move sooner if economic indicators show inflation and the employment picture improving. It also said it could move more slowly.

“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Fed said, adding language that gives it more flexibility to respond to economic data.

However, it sought to calm markets by adding: “The committee sees this guidance as consistent with its previous statement that” rates are likely to stay near zero for a “considerable time.”

“However, if incoming information indicates faster progress toward the committee's employment and inflation objectives than the committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated,” it added.

Markets shot higher on the suggestion that the central bank would move cautiously.

Why the change?

In a news conference following the announcement, Fed chair Janet Yellen said the central bank changed its guidance language because it seemed "less helpful to tie it to event receding into the past." The Fed completed its bond-buying program in October.

The language change seems to signal that the central bank is prepared to raise short-term interest rates in the middle of 2015, consistent with expectations of both economists and the markets.

Yellen said there are a range of views on the committee over when to move rates higher, but essentially the committee's position has not changed, despite the change of language.

"Given our statement that the committee can afford to be patient, it is unlikely to begin a normalization process for at least the next couple of meetings," she added.

But the Fed lowered its estimates of the pace of rate hikes, saying its median expectation for the level of the fed funds rate at the end of 2015 is now 1.125 per cent, down 25 basis points from the September meeting.

Economic activity expanding

In its economic update, the Fed said economic activity is expanding at a moderate pace and household and business spending were rising moderately.

It also expressed optimism about the labour market, saying "a range of labour market indicators suggests that underutilization of labour resources continues to diminish."

It expressed some concern about inflation, which is lower than the target rate because of falling oil prices.

“Inflation has been running below our target of two per cent, but we project that gap will close gradually over time,” Yellen said. 

Yellen spoke extensively about oil prices, calling crude’s decline “one of the most important factors affecting the global outlook.”

The U.S. is a net importer of oil and is expected to benefit economically from falling prices, Yellen said.

 “Typically the committee looks through the impacts on inflation with the view that they will be transitory.

But she is worried about inflation remaining low over a period of time because of the impact of lower oil. Today's CPI figures out of the U.S. underscored that worry.

Consumer prices fall

U.S. consumer prices fell in November at the steepest rate in almost six years, a seasonally adjusted 0.3 per cent, the Labour Department said.

Compared with a year earlier, overall prices rose 1.3 per cent in November and core inflation — inflation without volatile costs such as food and energy — climbed 1.7 per cent.

While a drop in inflation would ordinarily be seen as a sign of economic weakness, November’s numbers show how a rising U.S. dollar and lower oil prices are putting money in consumers’ pockets.

Treasury Secretary Jacob Lew likened the development to a beneficial tax cut for consumers and manufacturers. That means more consumer spending, a key driver of the U.S. economy.

But it clouds the picture for the U.S. central bank, which has a target inflation rate of two per cent.