Get ready, America: an interest rate hike is on the horizon.
The Federal Reserve decided not to raise interest rates in June, but comments Wednesday suggests the long awaited rate hike could come in September.
“No decision has been made by the committee about the right timing of an increase, but certainly an increase this year is possible,” Fed chair Janet Yellen said in a press conference Wednesday afternoon.
Translation: The Fed expects the U.S. economy to be in a good place soon, but it’s still in “wait and see” mode. It especially wants to see “further improvement” in wage increases, the ability of part-time workers to find full-time jobs and inflation closer to its 2% target.
“We have made some progress,” Yellen underscored.
Economy getting on track: A Fed rate hike would be a healthy sign for the economy. It means the central bank believes the U.S. economy is almost back to full strength after six years of recovery from the Great Recession.
The U.S. economy expanded at a healthy rate of 2.4% last year. Policymakers had hoped this year would be even stronger, but the Fed’s latest prediction is for 1.8% to 2% growth. That’s another reason the Fed is still hesitant to raise rates.
The Fed slashed interest rates to near 0% in December 2008 to help rejuvenate the battered economy. This summer could likely be the last time interest rates are this low, at least for a long time.
Wall Street has been antsy about the rate hike. The Fed hasn’t actually raised rates in almost a decade, so many investors aren’t sure how to react. The low interest rates have helped companies borrow money to expand and grow, and they have helped fuel great gains for the stock market.
Interpreting the Fed: The Fed is signaling that it’s time to take the training wheels off — for the economy and the market. The Fed has been preparing America for the change by altering the wording it uses in its recent policy statements. In December, it removed the phrase that it would wait a “considerable time” before acting. In March, it went even further and took out the “patient” to suggest the rate hike timetable was speeding up.
Now a rate hike is being decided on a “meeting by meeting” basis.
“Janet [Yellen] is doing a very good job laying the groundwork” for a September rate hike, says Ted Peters, former Philadelphia Federal Reserve board member and CEO of Bluestone Financial Institutions Fund.
There was little chance the Fed would raise rates at its June meeting. The economy contracted in the first three months of 2015 while inflation and consumer spending remained tepid. Its regained some momentum this spring, particularly in job growth, but the spring snapback wasn’t enough to justify a June rate hike.
Still some caution: One reality check was the Fed’s expectations for U.S. economic growth this year.
The Fed’s policy committee lowered its projections for economic growth significantly. In March, committee members projected 2015 growth would be between 2.3% and 2.7%. The new, lowered projection to about 2% signals how much the weak first quarter hurt the U.S. economy.
America was hit with a jaw-rocking 1-2 punch: the strong dollar is hurting trade and Americans still aren’t spending.
The left hook is the strong U.S. dollar, which has climbed in value against the euro, yen and most other world currencies in recent months. That makes it harder for American businesses to sell their products — computers and cars — overseas.
The upper cut is spending. The savings rate in America actually rose in April. The annual savings rate, now 5.6%, is higher than it was a year ago, and significantly higher than the pre-recession norm of around 3%.
Americans aren’t even spending the extra money that they’re getting from low gas prices. Many experts thought low gas prices would increase Americans’ confidence to spend. Not really.
Now the question is how much those factors stay around this summer. The Fed has largely been optimistic that the economy will gain momentum and a healthy, consistent pick up in spending, inflation and jobs before September.
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