FOMC in View Fed Prepares for First Rate Hike Since 2006

The Federal Reserve is getting close to raising interest rates for the first time in nearly a decade, perhaps in September. When it meets this week, though, don’t expect any timetable for a rate hike to be spelled out in a post-meeting statement. For now, the Fed wants to keep its options open.

Yet Chair Janet Yellen has left little doubt that the Fed is preparing to raise short-term rates by year’s end from the record lows the central bank set at the depths of the 2008 financial crisis. With the U.S. economy and job market now steadily rising, the need for ultra-low rates to stimulate growth is fading.

“Our economy is in a much better state,” Yellen told Congress earlier this month. “We’re close to where we want to be, and we now think the economy can not only tolerate but needs higher rates.”

The economy still faces an array of threats, from subpar U.S. manufacturing and business investment to troubles in Europe and Asia, which have roiled financial markets. Inflation also remains below the Fed’s target rate. And while the unemployment rate, at 5.3 percent, is nearly normal, other gauges of the job market remain less than healthy. Pay growth remains generally sluggish, for example, and many people are working part time because they can’t find full-time jobs.

But Yellen has stressed that when the Fed begins to raise rates, it will do so only gradually. The idea is to avoid weakening an economy that’s still benefiting from low borrowing rates resulting from the Fed’s policies.

Yellen has suggested that raising rates in small increments, followed by pauses, would let the Fed assess the effects of slightly higher rates. Higher rates would also allow the Fed to respond later to any weakening of the economy by cutting rates again.

via Mainichi

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza