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Fed Rate Hike Still Questionable but Economy Nearly Ready for Increase

ratesThe minutes from the July 28-29, 2015 Federal Open Market Committee (FOMC) meeting released Wednesday confirmed that the economy is still unprepared for a hike in the federal funds rate, but the increase is imminent.

In the Committee members' discussion on economic conditions and monetary policy most participants "judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point," according to the FOMC minutes.

At the July 28-29 FOMC meeting, Fed officials determined that economic activity is expanding moderately, the housing sector has shown additional improvement, and job gains have been solid with declining unemployment, but the federal funds rate will remain the same at a target range of 0 to 1/4 percent.

The Committee determined that labor market indicators found that underutilization of labor resources have diminished slightly, and growth in household spending has been moderate, while the housing sector showed some improvement. However, business fixed investment and net export remained soft. More importantly, inflation is still running below the Committee’s objective of 2 percent, reflecting earlier drops in energy prices and falling prices of non-energy imports. Looking ahead, the Committee still expects a moderate pace of GDP growth, with continuing job gains and lower energy prices supporting household spending.

In terms of housing, the committee found that recent data on housing starts and permits as well as the higher levels of sales and prices are signs of continued recovery in the market, according to the minutes.

In addition, looser lending standards for residential mortgages evidenced in the most recent SLOOS will further progression in the housing sector. However, a couple of committee members said they "did not expect this sector to be a major contributor to economic growth over the remainder of the year."

"The Committee concluded that, although it had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met," the minutes noted. "Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range."

One member at the meeting pushed for the rate increase to occur at the July meeting but was willing to wait for additional data to support the increase.

Janet Yellen, Chair of the Board of Governors Federal Reserve System

“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy," said Janet Yellen, Chair of the Board of Governors Federal Reserve System at the July FOMC meeting. 

Janet Yellen, FOMC chair revealed at a mid-July House Financial Services Committee hearing that rates would be raised upon improving economic conditions at no particular time.

“At our meeting that ended today, the Committee concluded that these conditions have not yet been achieved. It remains the case that the Committee will determine the timing of the initial increase in the federal funds rate on a meeting-by-meeting basis, depending on its assessment of incoming economic information and its implications for the economic outlook.”

However, Yellen did allude to the rate increase possibly occurring before the end of the year in a Senate Banking Committee hearing also held in mid-July .

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy," Yellen said. "Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end. But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise the rates at any particular time."

The committee has three more meetings this year in September, October, and December to still decide if and when rates will be raised.

Click here to view the Minutes of the Federal Open Market Committee July 28-29, 2015 meeting. 

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.
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