June Interest Rate Preview: Uncertainty Mounts

May 31, 2016United Statesby EW News Desk Team

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Investors are reconsidering earlier expectations that the Federal Reserve will increase interest rates in June.  After several speeches from regional Fed presidents strongly suggesting a rate hike was imminent, Federal Reserve president Janet Yellen struck a more conservative tone late last week, hinting that the Fed might wait a little longer before raising interest rates.

"It's appropriate, and I've said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate,” Yellen said at a presentation at Harvard University, where she fielded several questions about the central bank’s economic outlook.

Many analysts were expecting her to hint at a June meeting, but her statement about coming months has led some economists to suggest a rate hike may wait until July or later.

She added that further stability in oil and dollar prices had helped American inflation to accelerate, but also noted that the economy was enduring a “slow recovery” and that the Fed should not raise rates too aggressively, lest it cause that recovery to slow even further.

"If we were to raise interest rates too steeply and we were to trigger a downturn or contribute to a downturn, we have limited scope for responding, and it is an important reason for caution,” Yellen told the audience at Harvard.

The comments helped the 10-year U.S. Treasury yield, which ticked upwards by 1.5 basis points, but the yield still remains near its historic low at 1.85%. After the global finance crisis in 2008, the 10-year Treasury has remained far below 3%, except for a few weeks at the beginning of 2014.

A substantial decline in Treasury rates over the last two years has partly been triggered by weak oil prices, which caused inflation to decelerate and briefly turn into deflation last year.

This trend has reversed sharply throughout 2016, and prices have begun climbing in recent weeks, helped in part by a rise in oil. Oil prices rose to over $50 last week, as priced by WTI futures.

Gas remains relatively cheap in the United States, however, and economists remain unsure how this will impact American consumer behavior going into Memorial Day weekend. According to the U.S. Energy Information Administration, retail gas prices remain at their lowest since 2009 on a year-over-year basis, with average gas prices at $2.30 per gallon on May 23.

When oil prices began to fall in 2014, many economists predicted resurgence in retail spending. That failed to materialize. Now that gas prices have risen slightly from their lowest point in 2015, however, retail sales have been rising. In April, retail sales rose to $453.4 billion, a rise of 3% from the same period a year ago.

That has also helped many economists raise their GDP estimates for the second quarter, with some estimating a growth rate nearing 3% after the anemic 0.5% growth that America saw in the first quarter of the year.

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