Fed’s Looming Hike Likely in 2015

By Stephanie Tsui

Federal Reserve officials signaled on Wednesday that the US economy is strong enough to support at least one rate hike later this year, but reiterated that it will happen only after seeing continued improvement in the labor market and when being “reasonably confident” that inflation will move back to the annual 2% objective by next year.

“There is still some cyclical weakness in the labor market.” Fed Chairwoman Janet Yellen said, pointing to the low labor participation rate, elevated involuntary part-time employment rate and relatively subdued wage growth. “My colleagues and I would like to see more decisive evidence that a moderate pace of economic growth will be sustained.” she said.

Yellen also noted that overall inflation is likely to run at a low level for a long period of time, due to the big decline in oil prices, but “the fact that energy prices have stabilized means that the pressure from that source is diminishing.” she said. Yellen is “reasonably confident” that inflation will move back to its 2% objective over the medium-term.

With regard to the timing of an interest hike, Yellen said it will depend on unfolding data in the months ahead. “But certainly an increase this year is possible; we could certainly see data that would justify that.” However, she stressed the move would be “gradual,” and that the Fed wouldn’t follow a “mechanical” formula.

Andrew Tilton, Chief Economist, Asia Pacific at Goldman Sachs shared at an investment summit that he has now switched view to a December rate hike instead of a September hike.

In a forecast released by the Federal Reserve, 15 of 17 Fed policymakers indicated the fed should raise interest rates this year, with seven of them expecting no more than one rate hike this year, while two officials believed the Fed should not move at all until 2016.

It is estimated there will be two quarter-point rate rises for the Fed funds rate to reach 0.625% by the end of this year, according to the median estimate in the Federal Open Market Committee’s quarterly Summary of Economic Projections, in line with their median estimate in March.

Stocks edged higher after the Fed announcements, with Standard & Poor’s 500 Index up 0.2% to 2,100.44.Ten-year Treasury note yields were little down at 2.31%. BM