Media Moves

Coverage: When will rates rise?

April 30, 2015

Posted by Liz Hester

 

With slower than expected economic growth numbers this morning, it was no surprise that the Federal Reserve Board pushed off raising rates, leaving it vague on when that might happen.

The Wall Street Journal story by Jeffrey Sparshott and Jon Hilsenrath offered these details about the Fed’s decision:

The Federal Reserve on Wednesday, seeking to look beyond a sharp slowdown in the economy at the start of the year, said it expects overall activity to rebound and left an increase in short-term interest rates on the table for the months ahead.

The timing, however, remains up in the air as the central bank now needs time to ensure its expectation of a rebound proves correct after a spate of soft economic data. That means the chances of a rate increase by midyear have greatly diminished, a point underscored by the Fed’s statement released at the conclusion of its two-day policy meeting.

“Economic growth slowed during the winter months, in part reflecting transitory factors,” the Fed said. The Fed also said that although growth and employment had slowed officials expected a return to a modest pace of growth and job market improvement, “with appropriate policy accommodation.”

The Fed’s policy meeting concluded a few hours after the Commerce Department reported that gross domestic product, the broadest measure of economic output, grew at a 0.2% annual rate in the first quarter. That followed advances of 2.2% in the fourth quarter and 5% in the third.

And those numbers mean the Fed has essentially ruled out June for a rate increase, Binyamin Appelbaum wrote for The New York Times:

Strong job growth during the first two months of the year was followed by a disappointing increase of 126,000 jobs in March. The government will publish an initial estimate of April job growth on May 8.

Inflation also remains sluggish. Although concerns about deflation have subsided, price inflation remains well below the 2 percent annual pace the Fed regards as healthy, and wage increases are also subdued.

Some of the weakness is probably temporary. Cold weather during the winter months once again disrupted economic activity, as did a labor dispute at West Coast ports. But growth also is being suppressed by a strong dollar, which has reduced exports and increased imports, a trend likely to persist.

The Fed did not directly address when it might start to raise short-term rates, which it has held near zero since December 2008. Officials have said previously that they would begin to consider such an increase at the committee’s next meeting, in June. Analysts generally predict the Fed will not act before September, and possibly later.

Instead of predicting a first rate hike between June and September, officials have all but ruled out June, and doubts about September are growing too. William C. Dudley, president of the Federal Reserve Bank of New York, said last week that “hopefully” growth would be sufficient to raise rates this year.

Lucia Mutikani wrote for Reuters that the economy wasn’t strong enough to stand on its own, prompting the Fed to keep rates at their current levels:

“The U.S. economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “A June liftoff is now off the table, our forecast for a September move holds but even that has become tenuous.”

Fed officials at the end of their two-day policy meeting on Wednesday acknowledged the softer growth, but shrugged it off as “in part reflecting transitory factors.”

The dollar hit a nine-week low against a basket of currencies. Prices for U.S. Treasury debt fell in line with a global bond sell-off, sparked by a poorly received five-year German bond auction. U.S. stocks were trading lower.

Economists had expected the economy to expand at a 1.0 percent rate. The sharp growth slowdown is probably not a true reflection of the economy’s health, given the role of temporary factors such as the weather and the ports dispute.

“The extent and depth of the weakness in today’s GDP report, sets the U.S. up for another disappointing though somewhat better GDP report in the second quarter. We are not ready to throw in the towel for the year,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

The Financial Times story by Sam Fleming reported that the economic numbers were good for sending the dollar down:

Growing market disappointment in the US economy sent the euro soaring higher against the dollar, with the common currency increasing 1.75 per cent to its highest level for eight weeks and rising above $1.11.

Dollar strength has been accelerating since the start of the year and, coupled with the European Central Bank’s bond-buying programme, has steadily weakened the euro, in turn helping to drive European exporters.

But the marked currency switch has triggered two days of heavy losses for European equities. Germany’s Dax index fell 3.2 per cent on Wednesday, and in London the FTSE 100 index was down 1.2 per cent.

A key question is whether the US GDP numbers are set to repeat the pattern seen last year, in which the first quarter saw a 2.1 per cent slide in GDP, only to be followed by stellar growth numbers in the second and third quarters.

If the growth numbers rebound as the Fed seems to expect, then we’re likely to see a rate increase this year. Investors have already considered this in their decisions, but times of rate uncertainty tend to create some volatility as many try to decipher the timing of decisions.

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