Fed Rate Increase Not Likely
In an economic environment in the throes of an evident recovery for several quarters, actions by the U.S. Federal Reserve to raise interest rates seem to be the remaining link in a seeming undeniable chain of growth.
But one economist thinks the much anticipated pronouncement will not stem from this week’s two-day Federal Open Market Committee meeting. In fact, a rise in rates of any kind may still be months away.
“My expectation is that the Fed will stay the course at this meeting and retain the phrase about being patient when it comes to raising interest rates,” Greg McBride, chief financial analyst for Bankrate.com, said.
The U.S. economy is on solid ground, especially compared to the economies of other developed nations, but disappointing December retail sales and a decline in durable goods sales over the past few months have given the nation’s most influential financial body continued pause, McBride said.
There is also the continued matter of the jobs market. The jobs picture has brightened considerably over the past few years. Last year was the first time since the recession that the better-paying professional and business services category had outpaced the lower-paying retail, food and beverage categories.
But there is still ground to be gained, according to McBride.
“The Fed still wants to see continued improvement in the jobs market,” he said. “They want the economy to absorb the slack of the unemployed and those only working part time who would like fulltime employment. That, and income growth have been key.”
Bankrate.com polled many of the nation’s leading economists last year about likely progress in the jobs market. Eighty-eight percent said 2015 will be the year when wage growth catches up to job growth, once again balancing the nation’s income equation, McBride said.
“There has been a lot of water building up behind the dam,” he added. ”We’re seeing that a lot of the slack in the labor market has already been absorbed and new jobs are being created.”
When the FOMC meets in mid-March, it will have two more economic cycles and two more months’ worth of jobs reports to draw before it makes any interest rate decisions. The timing has likely added to their reluctance to announce any substantial changes when the meeting adjourns Wednesday, McBride said.
“Time will tell. Inflation remains low and the U.S dollar is strengthening, which is doing some of the work for the Fed, but there are still other factors to consider,” he said.
Continued economic struggle in Europe could cause the Fed to hold back on raising rates, although the Fed’s earlier, more conservative policy looked very good compared to those of the Eurozone, which is currently scrambling to right its economic ship in the water. That conservative approach may well continue, at least for the next few months.
“When it comes to the economy, we’re not exactly hitting the cover off the ball with the slow economic growth, but we’re doing significantly better than other developed markets around the globe and emerging markets as well,” McBride said.
But the Fed’s methodology has proved sound to date, and the American public can take the caution out of their optimism, he said.
“Rates will rise because the economy’s doing better and that’s the backdrop consumers and investors need to keep in mind,” McBride said. “During the back half of the year, we might see a couple of hikes, but they may be only quarter-point moves. Any steps taken will be very modest and they will be very deliberate.”