A survey conducted recently by Bloomberg News suggests that U.S. Federal Reserve movers and shakers may likely overlook low inflation rates and continue with their plans to raise interest rates by the middle of 2015 as they gather later on in the week for the year’s first Federal Open Market Committee (FOMC) meeting.
45 percent of the 53 economists surveyed by Bloomberg said that the Fed may increase overnight rates by June. Another 6 percent stated that July may be the time when the central bank raises rates, while 30 percent said that this may take place sometime in September.
Once the Fed raises rates as it is expected to do this year, this would mark the first time since 2006 the federal funds rate has been increased. Interest rates were kept at near-zero levels as part of the Fed’s “ultra-easy” policy in hopes of jumpstarting the U.S. economy following the global recession of the late 2000s.
Among those who predicted a June hike, a common sentiment was that low inflation is just one of the variables the Fed keeps in mind, and will not be the main determinant of when it plans to raise overnight rates. “The economy is increasingly showing signs that it is no longer in crisis mode,” said RDQ Economics chief economist John Ryding, who predicted a June rate increase. “Low inflation is mainly an oil price story.”
Even if the U.S. economy had markedly improved, the Fed will also have to deal with multiple international concerns that were not present, or hardly present, the last time the Fed’s Open Market Committee met in December 2014. This includes the European Central Bank’s announcement that it will be launching its own stimulus program, where beginning in March it will spend 60 billion Euros per month to avoid Eurozone deflation, or a broad and significant decrease in commodity prices.
Since the ECB made its stimulus announcement Thursday, the euro has weakened close to 3 percent against the U.S. dollar, which may be an albatross dragging U.S. economic growth down by raising the cost of the country’s exports. Most of the economists surveyed – 53 percent – said that the strengthening dollar against major world currencies will not be a factor in the Fed’s rate increase timing. 66 percent of those surveyed said that the ECB’s move will also not be important in forecasting the timing of the overnight rate hike.
Aside from European concerns and inflation, the Bloomberg survey also asked economists what they think about how Fed Chairwoman Janet L. Yellen will go about phrasing the central bank’s policy statement. 72 percent of economists said that they do not expect her to change the language in the statement at the end of the FOMC meeting.
But even with expectations generally pointing to a midyear rate increase, language appears to be one of the most important considerations the Fed has to keep in mind. Using the wrong words in its statement could have a discombobulating effect on Wall Street, as certain words or phrases could roil investors in the process.