Fed Stands Pat on Interest Rates

In a recent Federal Open Market Committee meeting, the Federal Reserve issued its latest statements regarding the status of the U.S. economy and where it sees the future of interest rates. An article published by the Wall Street Journal outlines the FOMC minutes and the Fed’s current stance on monetary policy. The Federal Reserve had announced at earlier meetings that it had intended to raise interest rates in 2015. Some analysts predicted it would be early 2015, while others viewed a potential rate hike as late as Q4 2015 or even early 2016. The Fed reiterated its stance that they seek to raise interest rates around mid-year 2015. So at the earliest, we would expect the Fed to raise interest rates at their June meeting. The FOMC minutes was also comprised of language that indicated the Fed was open to being patient and seeing how global economic events panned out prior to raising rates. The Wall Street Journal coined this as a “wait-and-see” approached.

There are many recent global events to be considered for the Fed to raise the interest rate. Over the past few months, the U.S. dollar has been surging against other currencies due to the strength of the U.S. economic recovery, end of quantitative easing, and hawkish comments made on raising the interest rate. At the same time, other countries including Japan and the Eurozone have embarked on further quantitative easing programs of great magnitude. The combination of strong U.S. dollar and quantitative easing in foreign nations make U.S. exports look relatively more expensive which could put a damper on the U.S. economic recovery. Raising the interest rate would only make the U.S. dollar even stronger relative to its peers, which could have a snowball effect on U.S. exports. Furthermore, the Eurozone was hawkish last year and raised their short-term interest rate as leaders of the European Central Bank viewed the European recovery as solid and were afraid of rising inflation. Now, the bloc of countries is at risk of falling into another recession and has launched another quantitative easing program.

There are risks outside of the monetary policy of other nations, as well. Raising interest rates is a way to combat rising inflation. According to the Bureau of Labor Statistics, the Consumer Price index ex food and energy is at 1.6% which is below the 2% target inflation rate set by the Fed. If the Fed did take the stance to raise interest rates, we would expect to see the CPI drop even further and not be at an optimal inflation rate. I agree with the Fed’s stance to take a ‘wait-and-see” approach. I do think however, that the Fed will remain dovish and that we will not see interest rates raised until the end of the year. There are too many variables that side against increasing the short-term interest rate right now or even in the coming months.

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