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  September Hike Still on the Table
Posted Under: Government • Research Reports • Fed Reserve • Interest Rates

No one expected the Federal Reserve to make any changes to monetary policy at today's meeting and there were no surprises.

Although the Fed did not change interest rates, it did make some small changes to the language in the statement, upgrading its assessment of household spending, housing and especially the labor market, using stronger positive language such as: "labor market continued to improve", "solid job gains", and "declining unemployment." It also upgraded its view of labor market underutilization, finding that this underutilization has "diminished" compared to "diminished somewhat" at its last meeting.

The Fed continued to recognize both lower inflation (due to falling energy prices) and lower market-based measures of inflation expectations. The language about energy prices stabilizing was removed as oil has continued its downward slide. Ultimately, though, the Fed's forecast is that the eventual end of energy price declines as well as the improving labor market will push inflation back up toward its target of 2%, which we fully agree with.

One sign that the Fed is moving towards raising rates was a small language change in the statement from needing to see further improvement in the labor market to now only needing to see "some" further improvement.

That may be small, but it seems the Fed is getting to a point where it feels more comfortable with where the labor market is.

All of this adds up to the likelihood that the Fed will start hiking short-term rates in 2015. We think September, although it could come a little later and a rate hike in October shouldn't be casually dismissed.

Even though we were not expecting it, we believe the Fed should have raised rates today; the economy can handle it. Nominal GDP (real GDP growth plus inflation) has grown at a 3.5% to 4% annual rate for the past five years. That suggests a "neutral" monetary policy, one consistent with a stable general price level, would put the federal funds rate somewhere north of 3%. So even a 1% federal funds rate would leave monetary policy expansionary.

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Posted on Wednesday, July 29, 2015 @ 4:45 PM • Post Link Share: 
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