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Fed holds course toward rate hike in 2015

Summary

The Federal Reserve indicated that it will keep interest rates at historic lows for the time being to support the job market, but higher rates are coming

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Interest rates remain on track for an increase in mid-2015, the first rise since 2006, the Federal Reserve signaled in its monetary policy statement Wednesday..

At the end of a two-day meeting, the Federal Open Market Committee announced that it would continue winding down its bond-buying stimulus program by cutting $10 billion from its monthly purchases, leaving the program on track to finish in October. The Fed buys Treasury bonds and mortgage-backed securities to keep mortgage rates low and support the housing market.

“The economy is continuing to make progress toward the FOMC’s objective of maximum sustainable employment,” Fed Chair Janet Yellen said in remarks after the meeting. However, “the labor market has yet to fully recover.”

The FOMC kept intact language saying that it expects to keep the federal funds rate — its main lever on interest rates — at its current near-zero level for a “considerable time” after the bond buying program ends.

Yellen has said the phrase translates to a period of about six months. but would not repeat that time frame in remarks Wednesday, stressing that the timing will depend on economic improvement. Some forecasters don’t expect a rate hike until late in the third quarter of 2015.

“There isn’t a promise about a particular amount of time,” she said.

When it arrives, the rate increase will have a pocketbook impact for most credit card users. Interest on variable-rate cards is linked to banks’ prime rates, which move in step with the federal funds rate. So when the Fed acts, people who carry balances on variable rate cards will see their monthly interest costs begin to rise. On the other hand, savers will benefit, as the paltry yields on saving accounts and money market funds will start to climb.

Once increases start, the pace of rising rates should be steady, according to projections released Wednesday by the FOMC. A majority of the rate-setting committee expects the federal funds target to climb above 1 percent by the end of 2015. The projection marks a slight shift from the committee’s last outlook in June, when a majority said the appropriate federal funds target rate for the end of 2015 would be 1 percent or less.

The projections also show that the Fed’s outlook on the economy has turned slightly downward since June. Most members of the rate-setting committee expect the economy to grow at a rate between 2.0 percent and 2.2 percent for 2014. In June, the consensus outlook was for a range of 2.1 percent to 2.3 percent.

Unemployment rate projections for the remainder of 2014 have dropped only slightly, down to 5.9 percent to 6.0 percent, from a range of 6.0 percent to 6.1 percent in June.

Wall Street feared that the Fed might step up the pace for its first rate increase in six years, after economic growth and ringing cash registers hinted that the economy could be heating up quickly. Economic growth, measured by Gross Domestic Product, accelerated to a 4.2 percent annual rate in the second quarter, according to revised figures from the Commerce Department, strongly reversing the first quarter’s shrinking economy. And retail sales of $444 billion in August were up 5 percent from August of 2013.

The rising spending is supported by increasing levels of consumer debt, including credit card debt, the Fed’s monthly G.19 report on consumer credit says. Consumers have added $140 billion to their non-mortgage debt load since the end of 2013.

But other indicators painted a more complex picture. The economy generated 142,000 jobs in August, pulling the jobless rate down to 6.1 percent but falling far short of analysts’ expectations of 230,000 new jobs.

More important, new inflation figures released Wednesday showed consumer prices falling 0.2 percent in August, the first decline in 16 months. Over the past 12 months, inflation came in at 1.7 percent, below the 2 percent rate the Fed has set as a long-term target for healthy economic expansion and job growth.

Inflation “remains benign at this point and is not likely to force the Fed’s hand in pulling forward the timing of the rate hike,” TD Economics Senior Economist Francis Fong wrote in an analysis.

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