It’s time for an interest rate increase, at least that’s what the Federal Reserve Board is signaling. And the markets like what they’re hearing.
The New York Times story by Binyamin Appelbaum reported the rate hike could come as early as June:
The Federal Reserve on Wednesday moved to the verge of raising interest rates for the first time since the economy fell into recession more than seven years ago, even as officials suggested that the Fed might not pull the trigger until well into the second half of the year.
In a statement released after a two-day meeting of its policy-making committee, the Fed said that it would consider raising its benchmark rate as early as June, and it removed from the statement a promise that it would be “patient.”
Yet the Fed tempered that message on Wednesday, including the release ofeconomic forecasts by its senior officials that showed they now think the unemployment rate can still fall significantly without setting off higher inflation. That conveyed an impression that Fed officials may feel less urgency about raising interest rates so soon.
Min Zeng and Corrie Driebusch wrote for The Wall Street Journal that some investors were caught off guard by the language, sending stocks up:
But the missive included many downbeat phrases about the state of the U.S. economy, suddenly raising the possibility that any move may come later in the year than many previously expected.
The comments wrong-footed some investors and caused sharp reversals across markets. The dollar, which had been on a monthslong tear against the euro, saw its biggest drop against the common currency in six years. Treasury yields, which had been edging higher in anticipation of rising rates, plummeted.
“The Fed caught everyone offside,” said Tom di Galoma, head of rates and credit trading at brokerage firm ED&F Man Capital Markets. Wednesday’s trading “was completely unreal, as everyone was looking to buy at once,”
Stock prices rose. The Dow Jones Industrial Average gained almost 200 points in the minutes following the Fed’s release of its postmeeting statement and then closed up 227.11 points, or 1.3%, at 18076.19.
Paul Davidson wrote for USA Today that Fed Chair Janet Yellen wasn’t ruling out the hike, but definitely wasn’t confirming it either:
A rise in the funds rate would ripple across the economy, pushing up rates for everything from mortgages and car loans to corporate bonds and personal savings accounts.
Although job growth has been strong, the Fed is hesitant to raise rates with inflation and wage growth persistently weak but policymakers have said they expect price increases to drift toward the Fed’s goal as oil prices rise.
“Just because we removed the word ‘patient’ from the statement, that doesn’t mean that we’re going to be impatient” as policymakers weigh an initial rate increase, Fed Chair Janet Yellen said at a news conference after the Fed statement was released.
She said the wording change “doesn’t necessarily mean (a rate hike) will occur in June…although we can’t rule that out.”
With inflation low, Fed policymakers lowered their median interest rate forecast for the end of 2015 to 0.625% from 1.13%. That suggests rates may be more likely to rise in September than June, which was the timeframe the officials had indicated late last year. The Fed expects the rate to be just under 2% by the end of 2016.
CNN Money reported that much of the confidence was coming from the economy, but wages could continue to be a drag:
America’s economy continues to outperform its peers around the world. The Fed’s likely rate increase this year stands in contrast to many other central banks, including Europe’s, which are lowering their interest rates to try to boost growth.
U.S. unemployment is at its lowest rate since 2008, gas prices and inflation remain low, and growth is chugging along at 2.4%. The Fed forecasts an even bigger economic expansion this year.
The headwinds: The major sticking point is wages. Many believe wage growth, which has been nonexistent, is around the corner, but Yellen continues to mention wages as one of her top concerns. They are only going up 2% a year, much slower than the 3.5% target.
Steve Schaefer pointed out in a Forbes article that the new wording could undermine the strength of the dollar:
If there’s been one bet on Wall Street that seems common of late, it’s putting money on continued strength from the U.S. dollar. The greenback has been surging for months, largely on the anticipation that the Federal Reserve will start tightening monetary policy against a backdrop of massive stimulus efforts by central banks in Japan and Europe.
That presumption got turned upside down Wednesday, when the Fed issued its latest policy statement and tempered its enthusiasm for U.S. economic growth.
It was the most exciting day for the Fed and monetary policy in a while, and investors will likely spend some time trying to sort through the nuance to determine their next moves. Rates were bound to rise at some point, but when could still be anyone’s guess.
