Federal Reserve Hinting at Raising Rates This Year

federal reserve hinting at raising ratesThe powerful Federal Open Markets Committee (FOMC) appeared conflicted on Wednesday June 17, holding interest rates steady at historic lows while foreshadowing two rate rises later this year.

Moderate improvements in the housing sector and household spending were offset by an unchanged level of unemployment. Inflation remained below the Fed target, mostly because of falling energy prices and cheaper imports. (Source: The Federal Reserve Press Release, June 17, 2015.)

However, the Committee estimates that these effects are diminishing and inflation will soon return to the two percent target. Gross domestic product (GDP) growth for the year was revised down to 1.8%.

The Market Reaction

Unlike previous FOMC meetings, markets maintained composure during the release of the minutes and subsequent press conference. After a gentle dip during the approach to 2:00 p.m., both the S&P 500 and the Dow Jones Industrial Average moved into positive territory. The NASDAQ also ticked up slightly. (Source: The Wall Street Journal, June 17, 2015.)

The Fed announcement led to a slightly weaker U.S. dollar, even as gold picked up about 0.42%. Yields on the 10-year Treasury bills dropped a small amount. Although gains were minimal, the absence of volatility in the wake of the FOMC meeting is notable.

Coming Soon

The Federal Reserve has been supporting the stock market for several years with a combination of rock bottom interest rates and bond buying.

The quantitative easing program was gradually withdrawn last year and investors were unsure whether the economy is ready for a return to normalcy. However, the language of today’s announcement has convinced most Fed-watchers that the first rate rise will come in September, followed by a second in December.

The increases in the interest rate are likely to be smaller than originally expected, but it appears that markets are now interpreting the rate rises as a positive sign.