Fed Meeting Could Result in Increased Interest Rates

When the Federal Reserve concludes its monetary policy meeting on Wednesday, the nation could see increased interest rates for the first time in nine years.

Though policymakers of the Federal Open Market Committee (FOMC) addressed possible rate increases in its March meeting, officials couldn’t agree on which step to take next. Some policymakers argued that raising rates at the end of the fiscal year would help to stave off inflation, while others argued that the strengthening dollar and declining energy prices would do that on their own. Many also claimed that the economy would be in a better position for rate hikes in another year or so.

In the end, the decision was tabled for a later date, and the FOMC moved to change its official statement on raising interest rates instead. While previously, the committee had said it would remain “patient” with regards to increasing interest rates, once the March meeting concluded, the term “patient” was removed from its official statement, presumably opening the door for rate hikes at future meetings.

The statement read: “With continued improvement in economic conditions, [Committee members] preferred language that would provide the Committee with the flexibility to subsequently adjust the target range for the federal funds rate on a meeting-by-meeting basis."

Though the Fed has said this act alone shouldn’t be considered a sign of things to come, the removal of “patient” was widely assumed to mean rate hikes were inevitably on the horizon. Once the Fed’s policy meeting concludes this Wednesday, the nation may find out for sure.

As for experts, most believe an increased rate is definitely on its way, but when that day will come? That they’re not so sure on.

"I don't think the Fed will have the necessary ingredients in place for a rate hike in June, but I expect economic growth and job gains to accelerate during the summer and that will lay the basis for a rate hike at the September meeting," Mark Zandi, chief economist at Moody's Analytics, told U.S. News and World Report.

Dr. Ataman Ozyildrim, director of business cycles and growth cycles at The Conference Board, told the MReport the Fed may want to hold off on raising interest rates in the near future.

“Leading indicators suggest the U.S. business cycle is entering a maturing phase almost six years after the end of the recession of 2008-09,” Ozyildrim said. “They still point to a moderate expansion, but economic growth ahead may be weak, and certainly doesn’t look to be much more than trend growth. Under these circumstances, the Fed might prefer to wait before raising interest rates at this time.”

Experts say there are dozens of factors that must be considered before the Fed can make a decision, and a questionable economy makes it even more difficult.

According to Business Insider, Patrick Newport and Stephanie Karol of HIS Global Insight said policymakers will need to factor in dock strikes, bad winter weather, the strong U.S. dollar and declining oil prices to get a clearer picture of the nation’s economy.

"We expect that second quarter economic activity will be stronger than in the first quarter, paving the way for a rate hike in September, but the Fed will have to feel confident in ongoing economic strength," Newport and Karol said.

Eric Rosengren, president of the Federal Reserve Bank of Boston, told the Wall Street Journal that the global economic climate would play a role as well.

“We are at very different points in the world economy,” Rosengren said. “That means we are going to be in an environment where exchange rates and interest rates may be more volatile than if everybody was moving more synchronously. We do have to be concerned.”

Dr. Ozyildirim said the Leading Economic Index (LEI) should be considered, too.

“When you look at the components of the U.S. Leading Economic Index, which is a forward looking index for the U.S. business cycle, building permits was the weakest component in March, but average working hours and manufacturing new orders have also slowed the LEI’s growth over the last six months,” Ozyildirim said. “These indicators all point to an economy at or maybe even slightly below trend growth. These are not conditions that suggest the economy is booming or overheating.”

The Fed will conclude its monetary policy meeting on Wednesday, April 29. Check back at the MReport for the full details.