Coverage: Federal Reserve likely to raise rates

No matter what headline or spin you put on it, the U.S. economy is expanding and the days of cheap money may be over. The Federal Reserve Board signaled they’re likely to raise interest rates next year.

Fed reporting wiz Jon Hilsenrath had these details in The Wall Street Journal:

The Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis.

In a statement Wednesday after a two-day policy meeting, the Fed broached the prospect of “beginning to normalize the stance of monetary policy,” the most direct formal reference to raising rates it has made in years.

Rates have been held near zero since December 2008 and since then the Fed has offered assurances that they would stay low amid low inflation and elevated levels of unemployment. The new statement said the Fed would be “patient” before raising rates, adding that the overall outlook hadn’t much changed from earlier assurances that rates would stay low for a “considerable time.”

Investors were whipsawed by the nuanced messages. Stock prices sharply extended gains when a reference to the “considerable time” assurance reappeared in the Fed’s statement. They fell when Fed Chairwoman Janet Yellen suggested a move after two meetings is possible, and then shot up again. The Dow Jones Industrial Average leapt 288 points, or 1.69%, to settle at 17356.87, its biggest gain in 2014.

Binyamin Appelbaum wrote for The New York Times that rate hikes are likely to come in the summer of 2015:

Stock markets, which have jittered up and down in recent days, rose sharply after the Fed released its statement at 2 p.m. The Standard & Poor’s 500-stock index rose 2 percent to close at 2,012.89, its largest daily percentage gain of the year.

“The Fed is in the fortunate position of enabling the economy to gather steam without the shadow of immediately rising rates,” said Paul Atkinson, head of North American equities at Aberdeen Asset Management, a British firm with $525 billion in investments. “In our opinion, that has to be positive for equity investors.”

Bond markets moved in the opposite direction as traders struggled to weigh the impact of the Fed news and events in Russia. The yield on the benchmark 10-year Treasury rose to 2.14 percent from 2.08 percent late Tuesday.

For almost a year now, Fed officials have pointed toward the summer of 2015 as the most likely time for the long-awaited lift of short-term interest rates, which the Fed has held near zero since December 2008.

Writing for Bloomberg Businessweek, Peter Coy said the Fed was watching the world economy closely:

The Fed published its 2 percent target for inflation in January 2012. Since then, consumer prices have risen at a compound annual rate of just 1.4 percent—a major miss. The Bureau of Labor Statistics announced on Wednesday, Dec. 17, that the annual increase in the CPI was just 1.3 percent. To be sure, that was largely the result of the big drop in gasoline prices caused by the extreme drop in crude oil. But even stripping out the volatile categories of food and energy, the increase over the past 12 months was below target at 1.7 percent. (The Fed goes by a different measure of inflation called the price index for personal consumption expenditures. It shows the same pattern. The overall number is up 1.4 percent over the past year through October and up 1.3 percent annualized since January 2012; the core number is up 1.6 percent over the past year through October and up 1.4 percent annualized since January 2012.)

While it wasn’t mentioned in the statement, international turmoil was on the minds of the Fed voters. In the press conference, Yellen said committee members are “very attentive to global developments,” while adding that members believed the drop in oil prices was a net positive for the U.S. economy.

“The Fed would like to start raising rates. Under normal circumstances, they probably would—sooner, rather than later—based on the fact that we’re at zero [the arget federal funds rate is zero to 0.25 percent] and the labor market is firming,” David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, an independent wealth management firm, told me before the decision. “The problem is that these are not normal times. The Fed has never turned a blind eye to the rest of the world.”

The Los Angeles Times said in a story by Jim Puzzanghera that the statement and decision was divided:

Yellen and most of the other Fed policymakers decided the time was right to change their language on interest rates even though economic conditions are weakening abroad, particularly in Russia.

The vote on the policy statement was 7-3.

The three no votes were unusually high for the Fed. Dallas Federal Reserve Bank President Richard Fisher and Philadelphia Federal Reserve Bank President Charles Plosser dissented; they wanted the Fed to indicate that it would act more quickly.

The other no vote came from Minneapolis Federal Reserve Bank President Narayana Kocherlakota, who opposed indicating that a rate hike was coming because inflation remains low.

Yellen said the weighty issue of deciding when to start reversing the Fed’s last remaining stimulus effort led to the dissents.

“At a time like this where we are making consequential decisions, I think it’s very reasonable to see divergences of opinion,” she said.

While diverging opinions are fine, it is interesting to see the Fed actually make a move after six year. The economy is never going to be perfect, and the decision to raise rates will never come at the opportune time. Now that the Fed is asserting itself, it will be critical for investors to read the signs and move money early.