This is a guest blog by Farnsfield Research on of the most critical issues to investors, what will the Fed do? Enjoy!
With the numbers showing close to full employment, the Federal Reserve may be preparing to move on raising short-term interest rates in June. The short-term interest rate has been near zero since 2008. The Labor Department reported an increase of 295,000 non-farm payrolls in February, and the past four months have seen fast-paced job gains, dropping the unemployment rate to 5.5 percent. The question on everyone’s mind is “Will they or won’t they raise interest rates in June?” Let’s take a look at what leaders are saying.
Federal Reserve Chairwoman Janet Yellen is still exercising caution about raising rates. She reported that the March 17-18 meeting of the Fed will see a patient approach even though robust numbers seem to signal a rate increase is coming. She talked about hints, but no significant wage growth when addressing the Senate Banking Committee recently. Officials are concerned about inflation running under their two percent inflation target and want to see what happens with output, employment, and inflation before any changes are made.
Scotiabank economists are saying the Fed will hike rates in June in spite of concerns about inflation. They say the risks that market watchers are citing, such as collapsing oil prices, are not a big enough threat to the U.S. economy to delay a mid-year rate increase. Scotiabank feels lower fuel prices could actually help inflation by encouraging consumer spending, creating more incentive to raise rates.
New York Post columnist John Crudele disagrees that the indications point to a mid-year interest rate increase by the Fed. He says the economy isn’t doing as well as the newer numbers might seem to indicate. He warns that because the dollar has recently risen against a range of currencies, companies doing business overseas will struggle and the U.S. government will have to pay more to borrow money. CNBC commentator Ron Insana agrees with Crudele and doesn’t think the Fed will raise rates at all this year because of a weakening world economy.
San Francisco Federal Reserve Bank President John Williams urges a rate increase, saying that waiting too long is riskier than starting a gradual increase now. He says mistakes now could mean the need for a bigger sudden rate hike later, which would have dire consequences on economic recovery. He supports his position by pointing to the 1965 economy, which had similar low inflation and economic growth as today and led to an economic boom.
This is in stark contrast to Chicago Fed chief Charles Evans’ call for delaying rate hikes another year. And chief market analyst at Phoenix Financial Services Wayne Kaufman says he doesn’t think the Fed wants to go against the trend of central banks around the world lowering interest rates.
The Real Debate
The real debate about the rate hike revolves around moving too quickly and risking harm to the recovery, or waiting too long and risking inflation or a financial bubble. Federal meeting minutes have indicated officials are more inclined to wait, not willing to upset a still-fragile economy or go against a weak global economy.
Amherst Pierpont Securities economist Stephen Stanley’s impression is that the Fed is remaining intentionally non-committal to when a rate hike would happen out of concern that financial markets could overreact. Deutsche Bank Securities chief U.S. economist Joseph LaVorgna feels the Fed is being much too cautious about markets.
Employment numbers seem to be pointing to stronger economic recovery, but economists are looking more closely. Trim Labs, CEO Charles Biderman, says the Federal Reserve won’t be able to raise interest rates this year at all because even though there’s been rapid employment growth, it’s not real growth. It was due to the end of extended unemployment benefits pushing people into minimum wage jobs.
Do you think interest rates will be raised this June?
Max D. - Max is a technical writer who regularly contributes financial topics to Farnsfield Research and other investing blogs. Max spends his time running multiple companies in the financial sector. This allows him to have a constant finger on the pulse of the industry.