Federal Interest Rates Expected to Head North Next Month

Posted by Steph Kaye on Monday, June 6th, 2016 at 8:26am.

The economy’s prospects are brightening and Federal Reserve policymakers are indicating their readiness to nudge up a key interest rate.

Fed Chair Janet Yellen has stated it would be appropriate to “gradually and cautiously” raise the benchmark rate “probably in the coming months” if the economy continues to improve as expected.  Yellen also commented at the slow pace of the recovery, but stated that she feels a great deal of progress has been made.  It is expected that a small rate increase will be forthcoming at the Fed’s June 14-15 policymaking meeting.

Eeconomist Diane Swonk of DS Economics is forecasting a June rate increase but said Fed officials could decide to wait until July, although it is unlikely that they will not wait any longer.  “They’re saying, ‘We’re ready to go. We can fiddle with the timing a bit, but we’re ready to go,’” stated Swonk.

On Friday, new data was released which reflected that consumer confidence is rising and the economic slowdown at the beginning of the year wasn’t as bad as initially thought.  The Gross Domestic Product was revised to a 0.8 percent annual rate for the January-March period according to the Commerce Department.  Although this was considered weak growth, it was an overall improvement considering the initial estimated percentage of 0.5 last month, the worst quarterly performance in two years. April through June are expected to see much stronger overall economic growth.  

The Federal Reserve Bank of New York forecasts that the economy is growing at a 2.9% annual rate in the second quarter, best performance in a year.

Consumers are ready to spend more after first quarter concerns.  Global growth triggered a deficit in financial markets, yet retail sales increased in April, the fastest pace in nearly a year.  The University of Michigan stated that its consumer sentiment index, a leading barometer, increased dramatically in May from April.  Consumers are rather pleased that stock market worries are now behind them and a strong economic rebound increasees the likelihood that Fed policymakers will inch up their key short-term interest rate this June.  They increased the benchmark federal funds rate 0.25% in December, up from almost zero for seven years in order to boost the recovery.  

A 0.25 percentage point increase for June is likely due to improved economic growth in the second quarter and a strengthened, post-inflation labor market.  

Central bank policymakers have publicly indicated an additional rate hike is nearing and Fed Gov. Jerome Powell stated, “depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon.”  James Bullard, president of the Federal Reserve Bank of St. Louis recently stated that it is time for the Fed to “pull the trigger” on another rate hike.

The U.S. economy is “on the verge” of meeting the conditions for a rate increase according to Eric Rosengren, president of the Federal Reserve Bank of Boston.

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