Fed says US economy strong enough to bear rate hike

US Federal Reserve policymakers indicate economy growing moderately, while strong enough to support interest rate hike by end of this year

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

As global markets were waiting for this month’s two-day Federal Open Market Committee (FOMC) meeting, Fed officials said the economic activity has been expanding moderately.

According to Fed, the economy is currently on track to grow between 1.8 percent and 2.0 percent this year, after contracting in the first quarter. Fed also said labour markets continue to recover, though unemployment would be slightly higher by the end of the year than previous forecast in March. The bank stated the inflation would remain low, but is expected to rise to Fed’s 2 percent target over the medium term.

The statement and the bank’s forecasts keep the Fed on track to hike interest rates once or twice over its four remaining policy-setting meetings in 2015.

Federal Reserve Chair Janet Yellen held a press conference after Fed’s statements and stated that although she is encouraged by tentative signs that wage growth and labour market are picking up, these are “not yet definitive” for a rate hike. Yellen also said rate hike will be determined with unfolding data.

“There are a set of risks that all of us need to weigh, waiting too long to begin normalization can risk significantly overshooting our inflation objective,” Yellen added.

“Beginning too early can risk derailing a recovery that we have worked a long time to achieve.”

She reiterated that too much attention is given on the timing of the first rate hike and emphasised the importance of long term view on rate hikes.

In Fed’s projections, the policymakers lowered their growth forecast for this year for the second time since December. In March, the bank had projected the economy to grow between 2.3 percent and 2.7 percent in 2015. However, 15 of 17 Fed officials still indicated that the first rate hike should be this year, not changing their predictions.

Fed meeting in June was the first since the depths of the 2007-2009 financial crisis in which the outcome was not constrained by “forward guidance,” which is the Fed’s open-ended commitment to keep rates low to fight against the outcomes of the worst crisis since the Great Depression.

There are concerns that higher US policy rates could result in significant market volatility with consequences to financial stability spilling beyond the borders of the US, especially in emerging markets.

After Fed’s comments on the US economy’s recovery combined with its strength to handle an interest rate hike later this year, US stocks rose. The stocks pared some losses and then hit session highs as Fed Chair Yellen spoke. The Dow Jones industrial average rose 0.43 percent to 17,982.28, while the S&P 500 gained 0.42 percent to 2,105.14. Meanwhile, the dollar extended its losses against the euro and the yen.

TRTWorld and agencies