United States Monetary Policy

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United States: Fed meeting minutes show caution regarding rate hike, Yellen testimony reveals new guidance

February 25, 2015

The minutes from the 28–29 January monetary policy meeting, released on 18 February, shows that economic developments are keeping the Fed from providing a clear date for when it will start boosting interest rates. Despite ongoing economic growth and improvements in the labor market, Fed members expressed concern about persistently-low inflation and limited wage growth, the negative impact of a strong U.S. dollar on exports, and the risk of spillover from weak growth and turmoil in global markets. Given these conditions, the Fed does not have enough confidence to push ahead with a concrete rate hike plan. Moreover, the Fed is worried that a premature rate hike will threaten a recovery that has taken several years to solidify.

Another issue on the Fed’s docket is with how to communicate its plans to the public. The minutes from the January policy meeting show that Fed members feared that removing the term “patient” from its statement would cause the markets to overreact and shift expectations unnecessarily. More recently, on 24–25 February, in a hearing before Congress, Fed Chair Janet Yellen revealed that subtle but important changes to the Fed’s forward guidance will be adopted in the very near future. Yellen explained that the Fed will begin by dropping the word “patient” and then proceed to consider interest rate hikes on a “meeting-by-meeting basis.” However, Yellen also emphasized that a modification of language did not necessarily mean that the Fed would increase interest rates within a couple of meetings, stating that this decision will always depend on incoming economic data.

In some ways, it appears that the semantics game continues, although the transition in guidance previewed by Yellen will give the Fed a bit more flexibility and should limit the risk of a knee-jerk reaction in the market once the Fed finally signals it is prepared for lift off. The possibility of a first rate hike in June is reinforced by Yellen’s statements, although economic data, particularly concerning inflation and related expectations are key determinants. Harm Bandholz, Chief U.S. Economist at Unicredit, explains:

“In our view, there is no doubt that from a fundamental perspective the US economy is more than ready to withstand some monetary policy normalization. But when the data will finally be good enough to convince also the more hesitant FOMC members has to be seen. We remain convinced that the date of the first rate hike is approaching rather quickly.”

The date for a first rate hike continues to dominate the debate. Looking further ahead, the focus will eventually shift to the pace of interest rate hikes. Regardless of when and how the Fed starts its normalization process, interest rates are expected to remain at historically low levels for an extended period of time.

FocusEconomics Consensus Forecast panelists expect the Fed to hike interest rates at some point later this year. Roughly half of the panelists surveyed expect the Fed to raise interest rates as early as Q2. The vast majority of panelists project the Fed will raise rates by Q3 2015, with an average forecast of 0.59%. The panel sees the federal funds rate averaging 0.87% at the end of 2015 and project that it will increase to 2.06% by the end of 2016.

Author:, Economist

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United States Monetary Policy Chart

USA Monetary Policy February 2015 1

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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