The Fed's Interest Rate Decision
The market has pushed short-term interest rates higher during 2015 while pushing longer-term interest rates lower.
(click to enlarge)
Chairman Yellen gave a speech on September 24th. The text of the speech may found at the Federal Reserve website. The speech covered many areas and ended with the following:
Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tighteningthereafter.But ifthe economy surprises us, our judgments about appropriate monetary policy will change.
The above language strongly suggests that the federal fund rate will be increased before the end of the year.
How fast might the federal fund rate be increased? The text says, "…a gradual pace of tightening…" What does gradual mean? The table below shows the median federal fund rate projection for 2015, 2016, 2017, and 2018.
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The following tables display the pace of the federal fund rate increase needed to hit the median and high rate and assume a 0 basis point liftoff point.
The pace of federal fund rate increase from October 28, 2015, meeting.
Source data: FOMC release
The pace of the federal fund rate increase from December 16, 2015, meeting.
Source data: FOMC release
While the Federal Reserve members suggest a gradual pace of increase to the federal fund rate. The pace of increase is greater during 2016 than for 2017 and 2018. Not certain that would qualify as gradual in my book.
The median outlook for the unemployment rate improved for 2016 and 2017 from the June projection and at the same time, the outlook for real GDP declined. This is somewhat confusing as the PCE inflation figures were revised lower as well. Lower inflation and better employment would have been expected to generate greater real GDP growth, not lower. Clearly, I am missing something, but what?
13 FOMC participants' place the appropriate timing for policy firming in 2015, with 4 participants' placing it in 2016 or 2017. Given this combined with Chairman Yellow belief that the federal fund rate should move higher in 2015. The odds favor an increase in the federal fund rate in 2015.
The size of the federal fund increase is the question. I had expected the FOMC to increase the lower range from 0.00bps to 12.5bps while maintaining the 25bps top range. The current expectation is that the FOMC will increase the federal fund rate to a range of 25bps to 50bps. This is based upon the median outlook, the data table for the pace of federal fund rate increase and short-term market interest rates moving higher.
There has been some recent weak economic data; however, it appears that it might be insufficient to delay an increase in the federal fund rate during 2015. The first federal fund rate increase is expected to be symbolic; the later increases may carry more substance.
The market has pushed short-term interest rates higher during 2015 and should provide the FOMC cover to increase the federal fund rate.
What do you…
Read more »SeekingAlphaSeptember 25, 2015 - 9:30 AM EDTNews by QuoteMediawww.quotemedia.com
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