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FOMC Officials Differ on Raising Interest Rates

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Federal Open Market Committee Participants are split on when to increase the federal funds rate. In the FOMC March meeting, they agreed to remove forward guidance that "the Committee can be patient in beginning to normalize the stance of monetary policy." In layman's terms, that means an increase in the fed funds rate is imminent.

A higher fed funds rate will lead to higher CD rates and other bank rates. The question remains when an increase will take place, most analysts believe a June or September increase will take place. The current fed funds rate has been near zero percent since December 2008.



The FOMC March meeting minutes showed that an increase in the target range for the federal funds rate remained unlikely at the April FOMC meeting. The minutes also showed removing the "patient language" gives the Committee the flexibility to begin increasing the rate in June or at a subsequent meeting.

FOMC Officials Differ on Raising Interest RatesA few FOMC officials have been talking about their preference on a rate increase.

The Boston Fed President Eric Rosengren, said in a speech at the Chatham House in London, “incoming data would need to improve to fully satisfy the committee’s two conditions for starting to raise rates.” You can watch the Boston Fed's entire speech: Changing Economic Relationships: Implications for Monetary Policy and Simple Monetary Policy Rules

Atlanta Fed President Dennis Lockhart said in a speech yesterday, "I would lean to a little later versus a little earlier," pointing to a September hike instead of a June hike. You can read the entire speech at the Palm Beach County Business Leaders Luncheon: To Liftoff and Beyond

Another Fed official's recent comments point to a June increase. Vice Chairman Stanley Fischer at an International Monetary Fund event in Washington on Thursday said, “there’s one weak employment report and five or six spectacular ones before it. We’re expecting a pick-up in growth following the first quarter.”

The deciding factors on exactly when an increase will take place is job growth and the unemployment rate. The May and June jobs reports will be released before the Fed's late June meeting. Strong reports will force the fed to increase the rate in June, whereas weak job reports will force the fed to wait.

If a June increase doesn't take place, a September increase is almost 100 percent certain. There will be three more jobs reports released before the Fed's September meeting. Very strong job growth such as 300,000+ jobs created a month might force the Fed to increase the rate between meetings.

A rate hike between meetings is the last thing the Fed would want to do for the first increase in almost 10 years. This would signal to the markets that the Fed has fallen behind the curve in raising rates. I believe in the short term, markets would decline dramatically on the news but then recover as investors realize an increase isn't the end of the world.

A higher fed funds rate will be welcome news for depositors after years and years of watching rates decline. Rates will finally move higher but in small amounts. It's very likely the first and subsequent increases in the fed funds rate will come in 0.25 percent increments.

Increases in CD rates, savings rates and money market rates will also come in 0.25 percent increments. By the end of 2015, 1 year CD rates could be around 2.00 percent or slightly above. Variable deposit rates will also increase towards 2.00 percent.

Looking forward to 2016, 1 year CD rates could rise towards 3.00 percent and even higher in 2017. All these forecasts are dependent on continued economic growth, job growth, and a lower unemployment rate. If inflation becomes a concern, interest would increase even more, though that is very unlikely.

Exactly when interest rates will increase is still up in the air but rates will be moving higher in the coming years. Be sure to position your finances for higher rates over the next several years.
 
Author: Brian McKay
April 17th, 2015