United States Monetary Policy

United States

United States: Fed keeps markets guessing about first interest rate hike, September move still a possibility

July 29, 2015

At its 28–29 July policy meeting, the Fed’s Open Market Committee (FOMC) recognized that the economy has continued to expand at a moderate pace, but refrained from offering an indication about when it will start raising interest rates. Many analysts had anticipated that the FOMC would provide at least a clue about its plans for hiking rates, but were left guessing once again. The Fed has three more meetings scheduled this year, in September, October and December, and is widely expected to announce an initial rate hike in one of these sessions. Moreover, while the debate has long been dominated by when the first rate hike will take place, questions regarding the pace of subsequent hikes are now attracting equal attention.

The Fed’s accompanying statement was little changed compared to last meeting. Monetary authorities pointed out that the economy is making slow but steady progress, with the latest data showing further gains in the labor market and declining unemployment. While growth in household spending has been moderate, the housing sector has shown greater improvement. Business investment and export growth, however, remain in a soft patch.

In terms of price developments, the Fed explained that inflation has, “continued to run below the Committee’s longer run objective,” due to the lagging effect of low energy prices and weak prices for imported goods. Market-based measures of inflation are low and survey-based measures of longer-term inflation expectations remain stable. However, the effects of lower energy and import prices are projected to dissipate and inflation is still expected to rise toward 2.0% over the medium term. Committee members kept their inflation forecast for this year at a range of 0.6%-0.8%.

In order to continue fostering growth in the economy and stoke inflationary pressures, the FOMC confirmed that the federal funds target rate would remain within the current range of between 0.00% and 0.25%. The Fed is confident that this accommodative policy will help economic output stay on an expansionary path and further strengthen the labor market.

Looking forward, the Fed emphasized once again that decisions to hike the rate still depend on the assessment of a “wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” The Committee stated that it will not raise rates until there have been further improvements in the labor market and until it is “reasonably confident that inflation will move back to its 2.0% objective.”

While the Fed continues to affirm that its decision is dependent on economic developments, the stage seems set for a rate hike later this year. In a supplementary document released after the previous meeting in June, 15 of 17 committee members projected that it would be appropriate to make a rate policy change some time this year. Given that the economy has held its ground and even improved in some areas since then, analysts are confident that an initial rate hike will indeed take place in the coming months. With the window of opportunity to act this year narrowing, analysts are now also focused on the potential pace of liftoff. Regardless of when a first rate hike is implemented, the pace of subsequent rate hikes is expected to be quite gradual.

FocusEconomics Consensus Forecast panelists expect the Fed to hike interest rates at some point later this year. The majority of panelists surveyed expect that the Fed will have raised interest rates by Q3 2015, with an average forecast of 0.44%. The panel sees the federal funds rate averaging 0.65% at the end of 2015 and projects that it will increase to 1.71% by the end of 2016.


Author:, Economist

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USA Monetary Policy July 2015

Note: Total assets on the balance sheet of the Federal Reserve in USD billion and Federal Funds Target Rate in %. Current rate set at a range of between 0% and 0.25%.
Source: Federal Reserve


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