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Fed Is Moving Closer to a Rate Hike


Fed Is Moving Closer to a Rate Hike

After all these years there was actually a decent chance of a Fed rate hike, but we’ll have to continue waiting. The Fed decided yet again not to raise interest rates.

The FOMC policy statement is very similar to the July statement. One significant change was an acknowledgement of the global economic uncertainties. The following sentence was added from the last statement: "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." There was also a change in the inflation description. It changed from "Market-based measures of inflation compensation remain low" to "Market-based measures of inflation compensation moved lower." In the press Fed Chair Janet Yellen mentioned both the global economic developments and the falling inflation as reasons why the FOMC decided against a rate hike.

Another change from July was the vote. One FOMC member finally dissented. Richmond Fed President Jeffrey Lacker wanted a rate hike in this meeting. He’s the most hawkish member on the FOMC (see Reuters Hawk-Dove scale), and I had expected him to dissent for at least one or two meetings before the majority on the FOMC finally decide for the rate hike. Lacker’s vote is a sign that the Fed is actually moving toward a rate hike.

In addition to the statement, the FOMC released its economic projections. Those projections include the timing of policy firming (the anticipated time of the first rate hike). Out of 17 FOMC members, 13 still think the rate will increase before the end of 2015. That should increase the chance of a rate hike at either the October or December meeting. However, this number is down from 15 in June. In June, only two members thought the first rate hike will be after 2015 (in 2016). Now there are four members who think the first hike will be after 2015 (three in 2016 and one in 2017).

The Fed’s economic projections also include the pace of policy firming (the anticipated federal funds rates in future years). This is a dot plot that shows the anticipated federal funds rates at the end of the year for the next few years. The average of the dots has moved down slightly. This indicates that the FOMC members anticipate fewer rate hikes in next few years. In fact, one FOMC member actually thinks the federal funds rate will be negative at the end of 2015 and 2016. One reporter asked Fed Chair Yellen about this. According to Yellen they are not seriously considering negative rates as a policy tool. Let’s hope they never do consider it.

I’m still optimistic about a rate hike at either the Fed’s October or December meeting. According to Fed Chair Yellen, October remains a possibility for a rate hike even though there is no press conference scheduled. Of course, there could be economic surprises that causes the Fed to change its mind. For the last several years the Fed has found many reasons to delay a rate hike. I’m hoping that will soon come to an end.

Future FOMC Meetings

The next three FOMC meetings are scheduled for October 27-28, December 15-16 and January 26-27. The December meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.

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Anonymous   |     |   Comment #1
The world is in so much financial trouble this is becoming a joke. The enormous leverage and accumulated debt is going to blow up in a rather unpleasant manner. This is worldwide in scope and it will be interesting to see how the average citizen reacts when they realize they've been swindled...again. I wish I still thought of fiat as an automobile. Oh, the good old days.     
Anonymous   |     |   Comment #4
When was that last time they realized? How did they react back then? 

Best guess: They will react the same way as last time.
buckeye61   |     |   Comment #3
Ken is more optimistic about a rate increase then I am. If, and when the FED does finally raise rates, I predict a very small increase followed by another long period of doing nothing.
Anonymous   |     |   Comment #5
Can you please be a bit more vague in that prediction of yours?
Anonymous   |     |   Comment #6
Yellen is afraid to increase rates.  She doesn't want to be the "ONE" who made the market crash (if it would really happen).  Her reasons are getting old.  There will ALWAYS be something going on in the world which will be the excuse.
Anonymous   |     |   Comment #7
This is no surprise. Goldman Sachs dictates to the Fed.
Anonymous   |     |   Comment #8
Bottom-Line Dilemma: In the past few decades, equities have become much more popular for average Joes and Jills to park their funds in than other alternatives that were popuilar in the fairly recent past. What's happening now with the Fed is like balancing on the head of a pin: On one hand, the Fed, for good reason is really concerned about an equities asset bubble and is trying to lessen the blow, and on the other hand, the Fed knows that without its cheap money-low interest rate policy the economy would be worse off than it is (and it knows the economy's now as well off as many thing or want to believe). Stay tuned for a bumper-car crazy ride.
Anonymous   |     |   Comment #9
Correction: #8. Next-to-last sentence should read: "...the economy's not as well off as many think or want to believe)..."
Anonymous   |     |   Comment #10
I am beginning to doubt that they will ever raise interest rates.  They are only interested in making sure that the stock market does not drop.  If interest rates rise, large number of savers who are in the stock market because of paltry returns on savings accounts and CDs will get out, and the stock market will collapse.  We savers, who were hoping for some decent and secure return have a very long wait, I am afraid.  We may as well kiss our plans for retirement, goodbye.
Anonymous   |     |   Comment #11
Janet Yellen is Lucy.  The rate hike is a football.  And Charlie Brown symbolizes all of us.
Anonymous   |     |   Comment #12
I have said it many times, and I will say it again. All this talk about what the FED will do is just a big waste of time. The FED can never increase interest rates. They need to keep the stock markets up at all costs. It would be devastating to pensions, annuities, insurance accounts, 401k accounts, IRAs, government investments, etc. if the stock markets dropped. It is too bad that so much of our so called "wealth" is based on the fictitious numbers of the stock markets.
Anonymous   |     |   Comment #13
The Fed is trapped as many of you point out.  It can't raise rates for many of the mentioned reasons.  Unfortunately, the music will stop when investors and global financial markets lose faith in the ability of the Fed and other central banks to manipulate markets.  When that loss of faith occurs, there will be a run for the exits, cash will be king, and in a highly leveraged world there will just not be enough to go around.
Anonymous   |     |   Comment #15
Exactly. Cheap money created speculation and leverage beyond all reason and it's beginning to implode. Money has value and when the value is 0% there's a problem. After seven years of 0% rate the little guy has yet to enjoy any of the rewards. Once again, enormous wealth was transferred to a few at the expense of the many. We built no infrastructure, we did not improve and thus protect our electrical grid, we did not develop our enormous energy capacity, we did not transform low rates into a more stable, more efficient economy and we did not address any of our most pressing social issues. Anyone in the stock market in 2007 who was convinced to HOLD before and during the crisis knows how long it took to get "back to where they were". Just wait until those levels (14,000) show up on the ticker. Think not? Well, 14,000 is a mere 15% decline from the current Dow.
Anonymous   |     |   Comment #16
My thoughts exactly.
gregk   |     |   Comment #14
So many here speak of pressure on the Fed not to hike because of danger that would collapse stocks (and even predict they will never do so because of that prospect), but no one speaks of the bond market (many times larger than equities) and the devastation rising inflation can wreak on this area of the financial world.  Therein lies the clue as to when the Fed will begin acting IMO.  
Anonymous   |     |   Comment #18
You can say that again.
Anonymous   |     |   Comment #17
Anyone willing to give the FEDs a benefit of doubt?...  No?

Is there a remote chance that FED is trying to fulfill the dual mandate?

Yes, yes ... I know ... majority opinion here of the (so called) savers is that the FED is a mistress of the Wolves on the Wall Street, ... but heck ... is there even a remote possibility that actually the FED officials are highly principled public servants are trying to do what the elected officials have charged them to do? ... No?  ... No such possibility at all?
DCGuy   |     |   Comment #19
I was going through some old bank statements to toss out from 1999 and saw the offers for a 30 month CD at 7%.   Regular savings rate was around 4 to 5%.  If you see these type of rates again soon, it will require a rather radical change in the world economy and the markets.  My insurance rates back then also were significantly lower than they are today.  Low insurance costs and high savings rates. Now it is the inverse and may not flip back unless a catastrophe occurs.
Anonymous   |     |   Comment #20
Welcome to Obamacare.
Anonymous   |     |   Comment #21
Have you found Sen Cruz's B-Cert?
Anonymous   |     |   Comment #22
But the kicker — the one that pushed large-cap stocks lower into the closing bell — was the appearance of a negative interest rate projection by a Fed policymaker on the newly released “dot plot.” Someone, it seems, expects federal funds policy rate to be in negative territory at the end of 2016. Four officials don't expect any hikes this year at all.