Will the US Federal Reserve raise US interest-rates?

Later on today sees the latest policy announcement by the US Federal Reserve and it is travelling a road which central banks have found to be very difficult in the credit crunch era. In essence it is looking to exit at least some of the stimulus measures that it has applied to the US economy as a response to the impact of the credit crunch. So far it has stopped its Quantitative Easing purchases but has not fully ended the policy as the stock of debt remains and it continues its policy of rolling it on in time or Operation Twist. Here is it’s own statement on this issue.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

However the meat of today’s Fed meeting is around its view on interest-rates and specifically whether it will continue to tease investors,consumers and workers on the subject of higher official interest-rates. From the minutes of its December meeting.

However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.

This is a familiar tactic from a central bank these days where Forward Guidance has morphed into a policy of hinting at interest-rate increases. However in my own country of the UK these hints have become like the boy or indeed girl who cried wolf. Last summer Bank of England Governor Mark Carney tried it in his Mansion House speech and this week Kristin Forbes of the Bank of England tried it too. This weeks effort rather clashed with the weaker rate of GDP growth that the UK reported only yesterday and Mark Carney’s effort has clashed with what he has done since i.e nothing.

Why might you expect a US interest-rate rise?

In essence the case was made by the US GDP report for the third quarter of 2014.

Real gross domestic product — the value of the production of goods and services in the United  States, adjusted for price changes — increased at an annual rate of 5.0 percent in the third quarter of  2014, according to the “third” estimate released by the Bureau of Economic Analysis. In the second  quarter, real GDP increased 4.6 percent.

Care is needed as these are annualised numbers but the US economy was expanding at a fair old lick if they are in any way accurate and this leads to potential fears of overheating and possible inflationary pressure.

What is the state of play now?

On Friday we will receive the GDP figures for the whole of 2014 but the up,up and away theme of the previous GDP reports discussed above has hit trouble this week. Let me show why this has happened.

New orders for manufactured durable goods in December decreased $8.1 billion or 3.4 percent to $230.5 billion, the U.S. Census Bureau announced today. This decrease, down four of the last five months,
followed a 2.1 percent November decrease.

The durable good numbers are an erratic series heavily influenced by the aircraft sector and Boeing in particular. But I note that as well as a weak December that November was revised lower and that four of the last five months have shown a fall.

Also the housing market showed signs of a price slowdown. From the Case-Schiller report.

Prospects for a home run in 2015 aren’t good. Strong price gains are limited to California, Florida , the Pacific Northwest,Denver,and Dallas . Most  of the rest of the country is lagging the national index gains. Moreover, these price patterns have been in place since last spring. Existing home sales were lower in 2014 than 2013,confirming these trends.

House price increases had risen to an annual rate of over 12% on some measures but have now dipped to below 5%.
What about inflation?

The Federal Reserve made an odd statment last time around as shown below.

The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

The odd bit is explained clearly in the latest consumer inflation data.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4 percent  in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index increased 0.8  percent before seasonal adjustment.

As you can see there was a by now familiar fall in consumer inflation in December. Now whilst this is not the number explicitly targeted by the Fed which uses the Personal Consumption Expenditure or PCE deflator we do have a very broad hint. For now inflation is both low and falling. We also now that oil and commodity prices are continuing on a weak path with Dr.Copper for example moving around the US $2.50 level which means that it is some 23% lower than a year ago.

What about wages?

Whilst the latest US labour market report should strong quantity gains in terms of employment and falling unemployment the price issue had a hiccup.

In December, average hourly earnings for all employees on private nonfarm payrolls  decreased by 5 cents to $24.57, following an increase of 6 cents in November. Over  the year, average hourly earnings have risen by 1.7 percent.

As you can see the US has both nomianl and real wage growth albeit at low levels. Also the wage growth may well now be slowing meaning that any real wage growth will depend on inflation falling further. Not exactly boomtime is it? So far anyway it all looks rather mild and weak.


If the official data is any guide then the US economy has been in a recovery phase for a while now and economic growth acclerated in the summer and autumn of 2014. However we do not yet know the numbers for the last quarter and there have been more than a few hints that when it comes it will show a decceleration in GDP growth. If we add to that the fact that consumer inflation is slowing and wage growth has hiccuped then the case for a interest-rate rise seems to fade away. Perhaps the Eagles were on the case about it.

‘Cause I’m already gone
Yes, I’m already gone

Has the chance gone? Maybe. If we look forwards it may well turn out to be appropriate for 2016 but at a time of high uncertainty can we make that call now? I would like to see US interest-rates go higher but that is different from raising them into a consumer inflation fall and maybe also a wages dip. Plus we need to allow for the fact that the rise in the US Dollar has tightened US monetary policy. Also a rise now could end up like the ECB in 2011 which has followed interest-rate increases with successive cuts into negative interest-rate territory.

Also whilst official interest-rates are the subject of talk about increases I note that market ones as shown by bond yields are falling not rising. The ten-year Treasury note yields 1.79% as opposed to the 2.24% of a month ago.



15 thoughts on “Will the US Federal Reserve raise US interest-rates?

  1. Hi Shaun

    Personally I think the Fed and the BOE will continue in “tease” mode until the arrival of the next recession knocks the idea of increases on the head. After all the next recession must be due sometime in the next 12-18 months and a recovery built on debt must have a natural limit in any case. Of course no economic forecaster will forecast a recession; there is only a slight moderation in growth rates in the forecasting world (the OBR forecasts show continuing growth).

    It seems to me that we just have too much debt around and the higher it becomes (and it is substantially higher than five years ago) the less we can “afford” an increase in rates. The concentration in any discussion of this tends to focus on mortgage holders but we are now at the stage I think where low interest rates are making it much more expensive in other areas eg to save for a pension and, in the long run this may be somewhat more important. Of course to my mind this discloses the truth: that we have a dysfunctional economic system that will one day implode under the weight of its own excess.

    Also I do wonder how far some of the secular trends are now beginning to kick in with a vengeance and affect the economy by which I mean issues like an ageing population and the increasing use of automation and technology, quite apart from the continuing effects of globalisation. The baby boomers have started to retire in droves, not only here but in many developed economies within the last five years, and between this effect and the effect of technology we may well wake up in five years time to a radically different environment with fundamentally different challenges to those we now only view through a short term prism.

    • Hi Bob J and welcome to my corner of the blogosphere.

      I have been arguing since Christmas 2013 that in the UK the Bank of England is as likely to ease as tighten policy. Actually in spite of the hot air from Mark Carney tonight and Andy Haldane earlier I think that a policy easing has got more likely due to the oil and commodity price falls. The USA is not that different…

      As to your secular trends theory well it is 7 years or so since the credit crunch began or to put it another way tick tock, tick tock….

  2. ah so today’s teaser is

    “Will the US Federal Reserve raise US interest-rates?”

    Come off it Shaun , nothings has changed for the Banks , they for some unknown reason considering all the cash thats been thrown at them, still broke !

    EU QE is there to bail out the Banks over here should the Greeks default , and now they are thinking of not defaulting

    have they been paid off?

    can they be elected next time ?

    Will the Greek people ever get a Government that cares for them ?

    confused , you will be , enlightened you will not !

    Tune in for next weeks EuroSoap………

    Governance of the people by the Banks for the Banks …..


    PS; Next ” oil shocker price rise !!” , yikes , remember to keep your popcorn dry ……

    • Hi Forbin – “oil shocker price rise !!” – yes about April/May probably the beginnings of a long gentle rise not an explosion.

    • Hi Forbin

      Speaking of banks according to Capital Greece share prices of the Greek banking sector fell nearly 27% today making 43% for the week so far. But.but didn’t they pass the Euro area stress tests a few months ago?!

  3. Hi Shaun
    I think that your phrase “If the official data is any guide” says a lot, how the hell do we
    believe any of it.

    As a layman I want to ask about negative bond yields, If the g7 countries all bought
    each others debt at negative rates then presumably they would be almost cost free. They
    would then continue to fund the banksters and the big boys to protect mortgages and pump up
    the markets, but for how long? Wouldn’t this mean that effectively the wealth of the 95% of the
    worlds population would be in continual decline ? How far do you think negative yields can go?

    Confused, I am


    • Hi JRH

      Actually the Swiss National Bank gave that sort of thing a go at least in the Euro area (they had to do something with the cash they got vis the Swiss Franc cap). However there is a catch which is if you buy a bond at 101 and it is redeemed at par (100) then you have a loss. I am ignoring the difference between capital and interest and tax effects but losses there would be which would not necessarily be offset internationally.

      So far the limit has been Switzerland with negative yields out to the ten-year maturity andf no-one has gone to -1%. But should there be another collapse/default then maybe we will see that.

  4. Shale drilling activity is tanking and that has a knock on impact across the supply chain which will show up in reduced GDP shortly albeit it depends how much spare cash from the gas fill up compensates in increased consumption elsewhere.

  5. Hi Shaun
    ‘letter from America’.
    Q3 GDP number was possibly the most concocted in history ( and tht’s saying something). The 5% was dominated by a 3.6% or so number representing Obamacare costs which had to go somewhere, sometime this year. This has absolutely no bearing on economic wellbeing, so the full 2014 figure will also to a lesser extent be inflated by it, but 2015 will not. Non-employed are at a 35 year high, all job growth is in part-time jobs, wage growth is negligible. If this is the ‘world’s engine for growth’ then the machine has stopped.
    Gas prices ( as in ‘petrol’) have fallen rapidly ( below $2) , this is definitely helping people feel a little better ( little tax so oil price fall is truely reflected at the pump). It will have an impact on everyday life as transport costs are a huge factor in the US. But for how long? Will there be a sane ‘merit order’ in oil or will it be boom and bust? $60 or $150? Huge effect on us all, but especially in the US.
    FED has continued its ‘steady as we go’ mantra, ie make it sound like we know what we are doing. I doubt thrre will be more US QE because of the still unresolved housing problem now disguised in the ‘unregulated financial sector’, but they can’t run the risk of increasing rates either. Every global ‘shock’ will see the USD drift higher simply because there is nowhere else to go.
    People here are still in general ‘optimistic’ as usual, but increasingly they don’t really know why, the cultural mindset is changing but slowly.
    An anecdotal observation. Usually the US is perceived as somewhere you can buy anything all the time. As less and less is actually made in the US this has changed. Increasingly people have to wait 3/4 months for ‘big ticket’ items made elsewhere in the world. Compared with the UK and its network of trading links, there are many areas of the US where you feel you are living in a ‘big island’ in the ocean waiting for that passing steamer with supplies. Strange but increasingly true.

    • I guess many are thinking of Alistair Cooke although I was reminded also of the Proclaimers. Another way of looking at this is the bond market where post FOMC the ten year T-Note has risen strongly and seen its yield fall to 1.72%. The Long Bond (30 year) only yields 2.29% which if it is not an all-time low must be on the verge. Neither of those go with 5% annualised growth, after all who would bother with a bond then……?

  6. Is the US recovery real, or ersatz like ours – or perhaps this question is no longer fit for the “new normal” global economic system? Up is down, down is up, and now Carney says austerity is a mug’s game! Anyways, I’ve been hoping the waters would clear in the spring with a Fed hike, and at least the game of bluff would be over if their nerve fails. (Guess I’m old fashioned but it strikes me the centuries of 4% – 5% interest on cash in the bank is the centre pole on the circus tent of commerce). But now I’m losing hope, and if the Fed keeps muttering promises and does nothing in the spring we’re doomed, doomed I tell you: forced into more QE, emergency/new normal ZIRP, wage stagnation and crumbling public services until we get our own set of radicals and talk of a reboot, like the dapper Greek economics prof who gave his first news conference today.

    • Hi Peter Walsh

      Tonight Mark Carney has given quite a lot of advice to the Euro area.

      “Europe needs a comprehensive, coherent plan to anchor expectations, build confidence and escape its debt
      That plan begins but does not end with the monetary policy boldness of the ECB.
      That plan includes difficult structural reforms, but cannot be wholly reliant on them.
      That plan requires greater private risk sharing via banking and capital markets unions.
      But that plan also needs to recognise that private risk sharing will never fully replace public risk sharing so
      that plan should include what every other successful currency union has at its heart: mechanisms to share
      fiscal sovereignty. ”

      Two thoughts. Firstly hubris? Secondly imagine the furore if Europe had intervened in the Scottish independence debate in similar fashion…

  7. Hi Shaun, if the numbers are to be believed then there is nothing for the Fed to do (I haven’t seen any announcement in spite of the late hour – I’ve been too busy and am just calling in at my “must read” sites.).

    The only thing I think will make the Fed do something at the moment is the ECB QE antics with it’s consequent effect on Euro/dollar exchange rate – but a rate rise would most definitely NOT be on the menu.

    Funny, every time I post about a CB these days it’s always to say they should do nothing so they should like me at the moment! Song for today thinking of activities of FED and BOE and the latest ECB performance – “Money for Nothing” by Dire Straits and that is meant in 2 different ways for the ECB and then for the BOE and FED.

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