September looms large regarding the outlook for interest rates. The Federal Reserve Bank is approaching the annual Jackson Hole, Wyoming meeting of the two-day Federal Open Market Committee (FOMC), which commences September 16, 2015. Hot on the agenda is the consideration of a hike in the Fed Funds Rate target – the first increase since December 2008.
The Federal Reserve Bank System has two charges – to enable full employment and to control inflation. One of their tools to accomplish these is the Federal Funds Rate. The Fed Funds Rate is the rate that a bank or depository institution can borrow money at on an overnight basis, expressed in an annualized rate. When the economy turns down, the Federal Reserve cuts this rate (to encourage borrowing, then spending and ultimately economic growth). In a growing economy the Fed increases this rate to induce some drag on the economy in hopes of mitigating inflation. The FOMC defines the direction of Monetary Policy. They set key interest rates and alter the money supply by either buying or selling government securities.
The Effective Fed Funds Rate now rests at 0.13 percent. Since 2009 we have seen the lowest Effective Fed Funds Rate commencing data collection in 1954. The lowest effect rate was seen in January-February 2014 at 0.07 percent. In contrast, the Fed Funds Rate peaked at 19.10 percent in June 1981 (on a monthly average basis).
The following graph shows the Effective Federal Funds Rate monthly since 1975.
What is the current stance of the FOMC on rates? Following is the compilation of the latest comments from both voting members and alternates of the FOMC as reported by MarketWatch. The interpretation of a rate increase in September is mine, based on the latest comments tallied by MarketWatch. Your interpretation may differ. As of now, my reading says that four of the ten members say yes, four say no and two have yet to decide. The alternates, which no doubt will add a voice and opinion, are similarly divided.
To read the entire MarketWatch article click http://www.marketwatch.com/story/where-every-fed-member-stands-on-raising-interest-rates-2015-08-28?siteid=nwhpm
What do I think the FOMC is going to do on September 17th? I believe they will raise the target Fed Funds Rate at least 50 basis points (0.50 percent). Why? While the FOMC stated in June that long-run full employment occurs when the unemployment rate is in the 5.0 to 5.2 percent range, they remain flexible on defining current full employment given other economic factors. The second quarter 2015 GDP was restated last week from an advanced estimate of 2.3 percent to 3.7 percent – a strong showing for the economy. Second, if the Fed fails to raise rates and the economy weakens, they literally have run out of the option of changing interest rates, relying only on money supply changes to boost the economy. Third, a rate increase of greater than 0.25 percent would signal to the market how strong the Fed perceives the U.S. economy.
The caveat. If you ever learn one thing in business and politics, it is that as new information evolves, opinions can and should change. There is a lot of time for new information between now and September 17th.
Do I believe that a rate increase would impact housing sales? Yes-but in a positive manner since it would stir fence-sitters into action.
What are your thoughts?
Ted