The fourth scheduled FOMC meeting of the year ended today, and as expected there were no surprises in the FOMC statement. It looks very similar to the April statement. Tapering continues with a reduction of $10 billion in the Fed’s bond buying program (aka Quantitative Easing). That’s a little bit of good news for savers since this program will have to end long before the Fed starts to increase rates. One thing that’s not good news for savers is the Fed’s interest-rate language, what is called forward guidance. There were no changes in the forward guidance from the last meeting, and that gives the Fed a lot of leeway to delay rate hikes.
The only change in the FOMC statement was some noted economic improvements:
economic activity has rebounded in recent months
Labor market indicators generally showed further improvement
business fixed investment resumed its advance
In addition to the statement, the FOMC published a summary of economic projections. The sooner the economy improves, the sooner interest rates will rise. So we want to see revisions in the projections showing this improvement. This was seen in the unemployment rate projections which were revised down and in the inflation projections which were revised up. However, the GDP projections for 2014 were revised down significantly.
The projections also include the date of the first rate hike. In March, there were 13 members expecting a rate increase in 2015 and two members expecting a rate increase in 2016. In the latest projections, 12 members are expecting a rate increase in 2015 and three members are expecting a rate increase in 2016. It’s only a slight change, but it’s in the wrong direction for savers.
Chairwoman Janet Yellen gave a press conference this afternoon, and she again stressed that monetary policy will be driven by changes in the unemployment rate and in inflation. The sooner these move to their target levels, the sooner the Fed will hike interest rates. Chairwoman Yellen also stressed that there is "no mechanical formula" for when it will hike rates. So the Fed will be able to delay rate hikes if most members feel it’s best for the economy. Unfortunately, most of the FOMC members are inflation doves and they will likely push to delay rate hikes. In summary, I think there’s a decent chance we’ll see a rate hike in the second half of 2015. However, as we have seen over the last few years, it won’t take much to push this out into 2016.
Future FOMC Meetings
The next two FOMC meetings are scheduled for July 29-30 and September 16-17. The September meeting will include the summary of economic projections and a press conference by Chairwoman Yellen.