FOMC Unsure of When to Raise Interest Rates
interest rates continues to change. The most recent round of speculation is based on the FOMC's January 2015 meeting minutes. The minutes show the FOMC hesitating to increase rates in June 2015 on fears of derailing the economic recovery.
The FOMC participants noted several positive factors helping the economy. Household spending was increasing moderately. Recent declines in oil prices have given households more purchasing power as a result of spending less money on gas. Low interest rates and easing of credit standards will continue to help households. Gains in unemployment and income are also aiding the economy.
Despite low mortgage rates, the slow recovery in the housing sector is dragging on the economy. Wage growth has been tepid and if that continues, it could become a significant restraining factor for household spending. Inflation is still running far below the FOMC's target of 2.00 percent. CPI for the 12 months ending December 2014 was at 0.8 percent.
As has always been the case, there are some Fed officials who believe interest rates should be increased sooner than later. The officials discussed, or argued, the tradeoffs and risks of acting too soon or too late. With the current fed funds rate near zero percent, current monetary policy is excessively accommodative.
Raising interest rates too soon could derail the recovery but waiting too long could lead to undesirably high inflation in the future. Officials also suggested that keeping the fed funds rate near zero percent for a long time and then increasing it rapidly, if deemed necessary, could cause financial instability.
Even communicating an increase in the fed funds rate would be difficult when the inflation rate is running far below the 2 percent goal.
Some participants noted the communications challenges associated with the prospect of commencing policy tightening at a time when inflation could be running well below 2 percent, and a few expressed concern that in some circumstances the public could come to question the credibility of the Committee's 2 percent goal.
The outlook for inflation has been lowered recently, and one Fed official recommended that the Fed should be looking at ways to provide more accommodation, not less. Below, you can view the December 2014 Press Conference with Fed Chair, Janet Yellen.
The next FOMC meeting is in March and a slew of economic news will be released by then. The FOMC will have a clearer picture of a stronger economy and will likely change their language on monetary policy. The phrase "U.S. monetary policy stance that was assumed to remain highly accommodative for some time" will be dropped.
Unless the U.S. economy falls off a cliff, interest rates are moving higher but the question remains: when? We still believe a 0.25 percent "token" increase in the fed funds rate will happen in the June 2015 meeting. The timing remains up for debate but an increase in rates will surely happen in 2015.
Once the increases start, they will last for at least a couple of years. 15 of 17 Fed officials predict an increase in the fed funds rate in 2015. The FOMC's own fed funds rate forecasts are for the rate to be as high as 1.875 percent in 2015. Looking out to 2016, the rate is forecast to be as high as 4.00 percent and 4.25 percent in 2017.
If the Fed's forecasts are correct, a fed funds rate at 1.875 percent would send the best 1 year CD rates between 2.50 percent and 3.00 percent this year. If the rate is increased to 4.00 percent in 2016, the highest 1 year CD rates would be around 5.00 percent. It's been many years since we have seen 1 year rates at or above 5.00 percent.