Federal Reserve Planning to Raise Interest Rates

May 19, 2016Monetary Policyby EW News Desk Team

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The Federal Reserve made it clear that interest rates are likely to rise in June.  After raising rates in December, the market has seen much confusion about the timing of the next interest rate hike.

While GDP growth was soft in the first quarter of this year, recent Fed estimates show strong growth of over 2% for the second quarter, while strong retail sales growth and higher inflation indicate renewed strength in aggregate demand throughout the U.S. economy.

As these data points have surfaced, several Federal Reserve heads have made public statements in speeches and interviews suggesting that an interest rate hike in June would be appropriate. These comments follow an April meeting of the Federal Open Market Committee (FOMC), which concluded that there are several signals of strength in the U.S. economy, which bolster the case for raising borrowing costs for Americans.

The FOMC said in its discussion that the labor market is improving, while acknowledging a slight increase in joblessness. "Total nonfarm payroll employment expanded at a solid pace in March, and labor market conditions generally continued to strengthen. Although the unemployment rate edged up to 5.0 percent, both the labor force participation rate and the employment-to-population ratio continued to increase,” the FOMC said.

The Fed also sees improvements in getting and securing work, arguing that Americans are finding it easier to find a job than in the past. "The rates of private-sector hires and quits moved up in February, while the rate of job openings declined a little but was still at an elevated level,” the FOMC said.

That said, the FOMC also dismissed weak consumer spending, as measured by personal consumption expenditures. "Growth in real personal consumption expenditures (PCE) appeared to have slowed in the first quarter,” the FOMC admitted, but added: "Nevertheless, recent readings on key factors that influence consumer spending were consistent with a pickup in real PCE growth in the coming months.”

The Fed also believes Americans are capable of spending more, thanks to wage growth. "Growth in household spending had moderated, although households' real income had risen at a solid rate and consumer sentiment remained high,” the FOMC said.

Finally, the FOMC also acknowledged that the housing market has weakened in the beginning of 2016, but also dismissed this as a short-term anomaly. "Recent information on housing activity was broadly consistent with a continued slow recovery in this sector.

Starts and building permits for new single-family homes declined in March, but both measures were higher in the first quarter as a whole than in the fourth quarter of 2015,” the FOMC said. "However, starts of multifamily units continued to decrease in March. Sales of existing homes rose in March after decreasing in February, while new home sales moved lower in both months."

Markets had a slightly negative response to the minutes, falling from session highs, with major stock indices falling into negative territory in afternoon trading. The Dow Jones and S&P 500 ended the day roughly flat, however.