Officials at the Federal Reserve are beginning to reanalyze their predictions for the US economy amidst weak consumer spending and slow global growth, a situation that has challenged their commitment to increase interest rates in 2015.
Federal Officials Set To Increase Interest Rates amidst Economic Recovery
Federal Reserve chiefs in various states including Atlanta and San Francisco are set to lower their estimates of US economic growth but they are keen on raising interest rates at least by the middle of this year.
In the third quarter of 2014, the US economy grew at a much faster rate than it has in 11 years. However, stagnation in China, Japan and Europe have put a dump on global growth prospects, a condition that has seen the world bank and the IMF slash their global growth estimates.
At the same time, consumer spending in the US is still skittish, an indication that Americans may still be apprehensive about spending any extra cash they have, in spite of an improved job market and lower gas prices.
Fed officials practice patience
In an upcoming Federal Open Market Committee (FOMC) meeting, it is expected that federal officials will discuss the prospects of US growth and establish a set timeframe for increasing interest rates.
The FOMC is certainly not in a hurry to increase interest rates down from zero where they have been since 2006. Officials have hinted that an increase will likely not be announced before late April.
According to market observers of the federal funds futures, there is a 15 percent probability that the interest rates will be increased to 0.5 percent or more by the start of June.
There is good reason for the fed officials to continue with their plans to increase interest rates by mid this year—unemployment rates are significantly low and economic growth is expected to continue at a rate of 3.2 percent.
Inconsistent market signals
A decline in yields on sovereign debt in the US is sending mixed messages about the actual performance of the country’s economy. The decline could be an indication of a heavy demand for US assets against a background of stagnation in other economies. Or, it could be signaling further inflationary pressure.
It is expected that yields on U.S. treasury debt will fall further in the event that the European Central Bank goes on with its Quantitative Easing measures.
If low yields continue for the long-term, it could be an emphasis of the current economic growth that is characterized by higher mortgage applications and availability of cheap credit.
So far, the markets are jittery about the Fed’s capacity to dig the US economy out of a significantly low inflation. In the last quarter of 2014, inflation rose by 1.2 percent and it continues to be way below the 2 percent estimated by the Fed.
· When the Fed raises interest rates, government bonds and treasury bills become more attractive to investors than the stock market as they attract a higher return interest rate as well.
· The move to increase interest rates has made investors jittery as they wonder when the cheap money circulating the economy will come to an end.
· Investors would certainly be at ease if interest rates remained low because this would boost economic activity in the US.
· So far, US shares are rising at a better rate compared to that of other leading economies in Asia and Europe.
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