And yet despite a disappointing first quarter of the year for the US economy, Fed officials have remained insistent that after more than six years with interest rates at 0%, 2015 will be the year that changes. Voting Fed members unanimously signed off on the central bank’s latest policy statement.
Advertisement
But absent from the Fed statement was the likelihood of a possible interest rate hike. The official Q1 GDP number was revised upward to a positive 0.6% growth rate, a nice reversal from the contraction of 0.2% that was originally reported. With Q2 GDP data expected later today and a string of labour market and productivity data between now and the September FOMC meeting we could see further dollar strength as investors position themselves for the prospect of higher rates in the US.
And so how, then, does Wednesday’s meeting mark the end of a Fed era? And given this, a lot of attention is focused on the timing of the first rate hike. Almost a decade has passed since the Federal Reserve last instituted a rate hike. We remain of the view that the Fed will begin its normalisation process in September and barring any seismic jolts through global markets, will hike again in December.
One drawback is that cheap money can raise the inflation rate, which now remains well below the Fed’s target rate of 2 percent. In short, any big changes – or the announcement of a conference call – would be a huge surprise.
The Fed statement indicated that economic activity has been expanding moderately in recent months: household spending has been moderate; additional improvement in the housing sector; labor market continued to improve; solid job gains and declining unemployment; underutilization of labor resources has diminished.
Between now and the September meeting, we’ll also get two monthly jobs reports, which could pave the way for Fed action in 2015 from a Fed that appears anxious to do, well, something.
Advertisement
Ahead of the meeting, analysts at Deutsche Bank wrote that, “the Fed is in wait-and-see mode and will want to keep all options on the table going into the September meeting”. Spanish GDP, meanwhile, rose by 1% in the second quarter as the nation experienced its strongest growth period in eight years. Citing a robust and improving labour market the central bankers that make up the FOMC expressed their willingness to hike rates, but as always this was accompanied with the caveat that further evidence may be required before a final decision was made.
