This Wednesday, the Fed is announcing it’s policy statement and economic forecast. It is anticipated that the Fed will remove its pledge to be “patient”, in that they will be able to raise short-term interest rates as soon as June. The Fed has not increased rates since 2006, and has kept them at zero since December 2008.
The debate on raising interest rates is wide spread. Economists such as Paul Krugman and Larry Summers urge the Fed to remain patient. Krugman is quoted saying, “If we raise rates prematurely, we will be very very sorry, while if we wait too long, it will just be annoying… the list of things we don’t know is pretty impressive, especially the impact of the strong dollar on the economy”.
Overall, the economy has been posting mixed messages, making the Fed decision difficult to predict. On one hand, hiring is the strongest it’s been in 15 years, and shows no signs of slowing down. This generally has put cash into the economy, while also boosting the spirits of consumers. However, even despite the fall in oil prices, Americans are still not spending nearly as much as in the past. This is likely attributable to sluggish wage growth and high household debt levels.
Arguably, this slow growth is not necessarily a bad thing. Economist Richard Moody explains that much of the fast growth in the late 1990s and mid-200s was a result of individuals and companies increasing debt to gargantuan levels that could not be sustained.
http://www.marketwatch.com/story/us-economy-still-not-following-script-for-breakout-year-2015-03-15?page=1
http://www.marketwatch.com/story/welcome-to-a-fed-without-patience-2015-03-13
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I think this will make the next few months very interesting. If the early outlook right now predicts an interest rate increase in June, I’m sure the next 10 weeks of spring will be instrumental when it comes time to make the decision. I’ve linked an article that discusses how this interest rate increase would play out in terms of its effect on different groups. In short: good for the middle class, bad for Wall Street, TBD for the rest of the world. Surely something to keep an eye on…
http://money.cnn.com/2015/03/15/investing/stocks-market-federal-reserve-patient/
The Fed released its statement today, and, as expected, the word “patient” was removed. In response, the Dow spiked intraday in response to the statement indicating a positive response by financial markets. Many still look to the June and September meetings as likely times for the Fed to actually raise the rate.
A bit more time and the ambiguities of the Fed statement stand out. Other metrics (interest rate futures) now show that markets think any rate increase is further off than participants in the market assumed prior to Wednesday.
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