Fed Interest Rate Hike

CEIC Gallery/World Economy/Global Database - December 28, 2015 Summary Federal Open market Committee (FOMC) decided to end the seven-year period of near-zero interest and raised the Fed's benchmark interest rate for the first time since 2006. According to Chair Janet Yellen the interest rate raise in December would be followed by "gradual" tightening and further adjustments in the stance of monetary policy if economic activity continues to expand and labour market continues to strengthen. Despite the positive trends in the labour market with unemployment rate closer to the pre-crisis levels, growth in economic activity, investments and domestic demand remains insufficient. Also, FOMC’s main concern remains the low levels of inflation and inflation expectations as in 2015 the annual inflation is far below the Fed’s long-run objective. While the low inflation is partly reflecting the record-low oil prices, the measures of core inflation, headline inflation less food and oil prices, also indicate inflation rates far below the 2% target rate. Besides outlook for economic activity and inflation, the FOMC’s decisions for the benchmark interest rates will take into account external factors, including global financial markets development and slowdown in China and other emerging markets. In the charts below, we have listed some of the key indicators monitored by the FOMC in assessing the US economy outlook, including labour market, economic activity and price stability. Labour Market Persistent downward trend in unemployment rate and increase in employment indicate substantial recovery of the US labour market. Over the last five years the unemployment rate has fallen from 10% in the peak of the crisis to 5% in 2015, which is close to the lowest 4.4% pre-crisis level. In addition, in the second half of 2015 inital jobless claims fell to lowest level since 1973. However, despite the solid job gains in the last two years, employment ratio is still far below its pre-crisis levels, indicating underutilization of the labour resources and possible shift in the US economy potential level. Economic activity The recent data on most key indicators show a moderate growth in the US economic activity in the last year. Private consumption expenditure and private fixed investment are still growing, but the average growth rate has slowed in the first 3 quarters of 2015 compared to the same period in 2014. In September 2015 the annual growth of private consumption expenditure was 3.3% or less than the same period a year ago, when the growth rate was 4.6%. Private fixed investment growth over the first 3 quarters of 2015 has slowed down even more - from 8.3% in 2014 to 3.9% in 2015. On the other hand, housing and automobile sectors have improved in 2015. Private building permits issued in the first three quarters of 2015 have increased by 10.3% (or almost 1 million units) compared to the same period of 2014. Inflation Price levels remain the major Fed’s concern for the US economy outlook. Falling energy prices push the annual growth of the personal consumption expenditure (PCE) price index, the measure of inflation monitored by the FOMC, to near zero or the lowest levels since 2009. PCE price index adjusted for food and energy price, a measure of core inflation, also remains far below the Fed’s 2% target rate, which indicates that disinflationary pressure is not only due to oil prices but also to an impact of endogenous factors such as depressed demand and oversaving. In addition, market-based inflation expectations also increase the risk of persistent low inflation. In the second half of 2015 the TIPS breakeven rates, the spreads of Treasury inflation protected securities (TIPS) yield and Treasury notes yield, has fallen to a five-year low. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
4th January 2016 Fed Interest Rate Hike

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