Federal Reserve hints at June interest rate hike with new faith in US economy

Janet Yellen

US interest rates will remain unchanged until at least June, the Federal Reserve’s open market committee (FOMC) announced on Wednesday.

Signaling faith in the strengthening US economy, the Fed’s policy-setting committee softened its language regarding the global economy’s impact and implied openness to raising interest rates in the near future.

On Wednesday, the US central bank left interest rates unchanged at 0.25% to 0.5% for a third time this year. After the Fed raised rates from near zero for the first time in almost a decade in December, it was expected to hike rates four times this year. Since then, the forecast has been adjusted to just two hikes in 2016.

In its statement, the FOMC noted that it “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”.

“Fed officials, including chair Janet Yellen, have expressed worries about a softening of economic growth so far this year, anemic and fragile global economic growth, a strong dollar and financial market volatility,” said Chris Williamson, chief economist at Markit. “Yet the labor market continues to impress, with a strong rate of job creation being sustained in recent months, and consumer sentiment remains elevated.”

Jim O’Sullivan, chief US economist with High Frequency Economics, expected the Fed’s “tone to be a bit more positive than in March, consistent with another rate hike in June if – and only if – the data and markets are supportive”. Among the data considered by the Fed is GDP growth, the strength of the US jobs market, and inflation.

The Fed did not disappoint and in its statement signaled faith in the US economy.

“Labor market conditions have improved further even as growth in economic activity appears to have slowed,” the FOMC said on Wednesday. “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

And while US job gains were described as strong, the Fed did note that it expects inflation to remain low.

More importantly, Wednesday’s statement no longer included language it had used in the past noting that “global economic and financial developments continue to pose risks”. Instead, the committee only said that it continues to “closely monitor inflation indicators and global economic and financial developments”.

“In short, the more positive tone than in March is consistent with officials tightening again as soon as the June meeting, but only if the data and markets are supportive,” O’Sullivan said after the announcement. “We expect they will be supportive.”

When the FOMC met in March, two of its 10 members wanted to raise rates in the near future. Yet only one of them – Esther George, Kansas City Fed president – voted to increase the interest rates target range to 0.5% to 0.75% in March. On Wednesday, George once again cast the lone vote in favor of increasing interest rates.

Over the past couple of months, nonvoting members of the Fed including Atlanta Fed president Dennis Lockhart, Philadelphia Fed president Patrick Harker and San Francisco Fed president John Williams have expressed support in hiking interest rates soon.

Richard Fisher, former Dallas Fed president, also expressed hope that the Fed will increase interest rates when it meets in June.

“The Fed has the markets on Ritalin” – medication used to tread attention-deficit, hyperactivity disorder – “trying to keep the mood very smooth, keep volatility down as much as possible. As soon as they hint that they might remove that, then they create the problems that they’re afraid of,” he told CNBC on Wednesday. “They have boxed themselves into a corner.”

It will be interesting to see how they maneuver out of that box, he said. “The sooner they act, the better.”

Prior to Wednesday’s announcement, more than 80 economists polled by Reuters said that they were expecting two rate increases this year, with the first hike coming as early as June.

Not everyone is so sure that the Fed will manage to find a window for two rate hikes before the end of the year.

“Unless there’s a robust pick up in the data for May, Fed policymakers are likely to be looking at some gloomy economic trends at the June meeting, making a rate hike hard to justify,” explained Markit’s Williamson. “The Fed may also not want to unsettle markets with a rate hike just days before the UK’s 23 June referendum on remaining in the EU.”

Williamson pointed out that if US GDP picks up in the second quarter, it won’t be confirmed until after the FOMC meets in June. That could delay interest rate hike until September, which could be too close to the 8 November presidential election.

“That would then leave December as the next opportunity to raise interest rates, when the political and economic environments could look very different to now,” he said. “Barring a substantial and convincing improvement in the economic data flow between now and June, it looks like December could be the most likely next opportunity to hike rates.”

Powered by Guardian.co.ukThis article was written by , for theguardian.com on Wednesday 27th April 2016 20.25 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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