Fed Opens Door for Rate Hike, It Could Come As Early As June

The U.S. Federal Reserve will be holding its monthly policy meeting this week and it’s believed by many that this would be the meeting where the central bank decides to remove the all-important word “patient” from its hitherto low rate promise.

This is an interesting talking point with a few hours remaining before the Federal Open Market Committee meeting. For many top economists and strategists, the removal of the word “patient” could be a sign that the Fed is planning to begin raising interest rates from record-low levels as early as June. With the job market strengthening and other key economic statistics quite encouraging, it would not be a surprise if the Fed hikes rates in about three months from now. Still, others have the more dovish outlook of a rate hike happening by September at the earliest, while a select few foresee the rate hike happening by late 2015 or early 2016.

Fed Rate Hike

Further obfuscating the Fed’s potential decision on its official language is the strength of the U.S. dollar against international currencies. This has kept inflation even farther below the Fed’s threshold, and some see this phenomenon having a deleterious effect on the broader U.S. economy. Rate hikes could further strengthen the dollar going forward. However, it’s still likely that the Fed will play its cards close to its chest and choose not to give any direct answers with regards to its exact timeframe for the initial rate hike.

Federal Reserve Chairwoman Janet L. Yellen is not expected to provide any insight into the Fed’s forward guidance with regards to rate hikes just yet. Quotes recently attributed to Yellen have insinuated that any rate increase decisions will be based on current economic statistics, and that the Fed should still be flexible when it comes to its future plans.

That has not changed the outlook of some investors and experts, who are confident that the Fed will remove the word “patient” as early as now. “I think the odds are better than 50-50 that the Fed … will drop the word ‘patient’ at the March meeting, and that would put an initial rate hike in play, perhaps as early as the June meeting,” predicted author David Jones in a recent interview.
But is the time really right for the Fed to remove that key word and go forward with a rate hike in June? Based on employment stats, the answer would be yes. The U.S. economy has consistently been creating 200,000 jobs or more per month for the past year, while the jobless rate recently hit a seven-year low of 5.5 percent, which falls within the Fed’s definition of a healthy economy.

But inflation stats have not met the Fed’s policy goals. Inflation rising was at only 0.2 percent over the past 12 months, according to the Fed’s inflation metrics; this is far below the central bank’s goal of 2 percent per year. This is reflective of the strengthening greenback, which reduces import prices in the United States, and the continued drop in oil prices.