Federal Reserve policy makers are growing more optimistic about the economy and taking deliberate — though delicate — steps toward a possible interest rate rise in 2015.
The Federal Open Markets Committee (FOMC) is still skittish about signaling a move away from its easy-money policies that have been in place since the financial crisis. However, the group has started to talk about moving “toward normalization of its lending facilities,” according to minutes from the Fed’s Dec. 16-17 meeting.
While that’s the most direct reference to raising rates that the FOMC has made in years, there’s still no indication of exactly when they will make the move. The FOMC said it would be “patient” when considering changes to its current low interest rate policy, an update from its previous language that said it would be “considerable time” before any rate rises. The central bank last raised interest rates in June 2006.
The Fed will likely continue to keep interest rates near zero for the next several months. Many analysts are pegging May for a possible rate rise, given Yellen’s comments in a press conference following the December meeting.
“The statement that the committee can be patient should be interpreted as meaning that it is unlikely to begin the normalization process for at least the next couple of meetings,” she said.
Given that policy makers meet every six weeks, interest rates are unlikely to change prior to the start of spring. Yellen and the committee have continued to emphasize that any future rate increases would “depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2% inflation.”
Consumer prices declined 0.3% in November, partially driven by the steep drop in gas prices, according to Labor Department data. Inflation has remained below the Fed’s stated target for 31 consecutive months.
Meanwhile, the U.S. employment situation has been steadily improving, with employers adding 2.65 million jobs through November last year. Economist’s anticipate December was another strong hiring month and will help bring the unemployment rate down to 5.7% from its current 5.8% rate.
While Fed officials are attentive to any future downward shift in inflation expectations, or job gains, the larger focus is that the U.S. economy continues to post steady gains.
Any future increase to interest rates would be data dependent. Even if employment and inflation meet the Fed’s standards, the committee would still consider keeping interest rates low if underlying economic conditions remain weak.
The FOMC’s next meeting is Jan. 27-28.
