Research and Statistics

Fed signals step toward higher rates


The Federal Reserve indicated that the countdown is ticking toward higher interest rates later this year

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Interest rate setters at the Federal Reserve removed a key phrase from their policy statement Wednesday, signaling that rates could begin rising as soon as this summer.

“We do see considerable underlying strength in the U.S. economy,” Fed Chair Janet Yellen said in remarks after the release of the committee’s  policy statement at the end of its two-day meeting.

For now, the Federal Open Market Committee (FOMC) voted to keep the target for the federal funds rate near 0 percent, where it has been since the end of 2008. The rate on interbank loans is a benchmark for banks’ prime rate — and consequently for rates charged on variable-rate credit cards.

The major change came in the Fed’s statement of the rate outlook, where it cut the word “patient” from a sentence describing its approach to raising rates. In previous remarks, Yellen indicated that being patient meant waiting for two more meetings. Tightening rates “remains unlikely at the April meeting,” the statement said, implying that rates could rise in June.

However, “Just because we removed the word ‘patience’ from the statement does not mean we’re going to be impatient,” Yellen said in remarks to reporters after the meeting. Rate decisions will be based on measures of economic health, she reiterated.

In economic projections released Wednesday, FOMC members gave a less aggressive outlook for future rate hikes. Only four members now think the federal funds rate should be above 1 percent at the end of the year, while 13 favor rates below the 1 percent mark. In the previous forecast in December 2014, nine members saw the rate climbing above 1 percent by year-end.

“[T]he specific timing of the initial hike in the funds rate is not nearly as important as the pace of subsequent rate hikes,” Regions Bank chief economist Richard Moody said in a research note.

Just because we removed the word ‘patience’ from the statement does not mean we’re going to be impatient.

— Janet Yellen
Chair, Federal Reserve

As the central bank tightens the money supply, costs of credit will climb for consumers. Each percentage point added to the federal funds rate will add about $7.6 billion in yearly interest costs to existing credit card balances. As the rate hikes approach, time is running short to pare down debt that will become more and more expensive to carry.

Economic murk
The committee of central bankers looks at the health of the job market and the rate of inflation when deciding to push the button on interest rate “liftoff.” But while employment is showing health, with a gain of 295,000 jobs in February and the unemployment rate at 5.5 percent, prices are not rising.

Inflation, measured by the Consumer Price Index, fell at a 0.7 percent annual rate in January, according to the Bureau of Labor Statistics, pulled down by the plunging price of oil. The Fed is looking for a long-run core rate of 2 percent as a sign of healthy growth in the economy and a tight job market. But even excluding the volatile food and energy categories, prices were only up at a 0.2 percent annual clip.

In its economic projections, the Fed slightly improved its outlook for the job market, with the consensus expectation of unemployment rates between 5.0 and 5.2 percent this year.The outlook for core inflation rates fell to 1.3 to 1.4 percent, from a consensus range of 1.5 to 1.8 percent in the previous forecast.

Complicating the picture now is a rise in the value of the U.S. dollar, which has advanced 25 percent against the euro in the past year. While a strong dollar means cheaper prices for U.S. consumers, it puts a drag on sales of American-made goods abroad, potentially hurting factories and undermining the economy. U.S. stocks swung downward this week as Europe’s central bank embarked on a bond-buying program similar to a stimulus measure that the Fed wrapped up in October 2014.

If the Fed raises U.S. interest rates, the dollar will likely grow even stronger against foreign currencies, leading some economists to predict that the central bank will decide to remain patient a while longer, despite dropping the word from its policy statement. In fact, Wednesday’s statement noted that “export growth has weakened.”

“Delaying the liftoff would serve to maintain growth, with no appreciable risk of inflation,” University of Wisconsin economist Menzie Chinn wrote in a blog post.

Yellen noted that stimulus moves by other nations have an upside for the U.S. as well as a downside. “We are taking account of international developments,” she said, “including prospects for growth in our trade partners.”

Previous coverage:Fed keeps rates low amid mixed economic signals

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