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Interest Rate Hike Still a 2015 Possibility, Pending Economic Improvements

gavel-twoFederal Reserve Chair Janet Yellen served as the lone witness  in a House Financial Services Committee hearing on Wednesday titled "Monetary Policy and the State of the Economy.” In the semiannual report to Congress, Yellen was questioned about the highly anticipated rate increase, among other topics such as the overall state of the economy, inflation, employment, and monetary policy. She maintained her position on the uncertainty of the rate increase until further economic improvement occurs.

"A decision by the Committee to raise its target range for the federal funds rate will signal how much progress the economy has made in healing from the trauma of the financial crisis," Yellen said in a statement to the committee. "That said, the importance of the initial step to raise the federal funds rate target should not be overemphasized. What matters for financial conditions and the broader economy is the entire expected path of interest rates, not any particular move, including the initial increase, in the federal funds rate."

Chair Yellen updated the Committee on the progress of the economy toward meeting the four benchmarks for the economy as set by the Full Employment and Balanced Growth Act (Humphrey Hawkins Act) of 1978: full employment, growth in production, price stability, and balance of trade and budget.

Yellen also alluded back to her previous statement she made last week concerning federal funds rates remaining the same due to the increasing, but still lagging economy.

Although Federal Reserve officials determined that economic activity is expanding moderately and job gains are increasing, the federal funds rate will remain the same at a target range of 0 to ¼ percent, according to the Federal Open Market Committee (FOMC) June meeting held last week.

The Committee determined that labor market indicators 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.

 

“The Committee continues to judge that the first increase in the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” said Janet Yellen, FOMC chair. “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.”

 

The Fed Reserve Board of Governors also released a Monetary Policy Report in accordance with 2B of the Federal Reserve Act highlighting that the Federal Open Market Committee is committed to promoting maximum employment, stable prices, and moderate long-term interest rates.

“Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances,” the report said. “Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.”

According to the report, the FOMC believes that exceptionally low target range of 0 to ¼ percent for the federal funds rate and has kept the Federal Reserve’s holdings of longer term securities at their current elevated levels to help maintain accommodating financial conditions.

"The Committee has reiterated that in deciding how long to maintain the current target range for the federal funds rate, it will consider a broad set of indicators to assess realized and expected progress toward its objectives," the report said. "Since its April meeting, the Committee has stated it anticipates that raising the target range for the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. In the June SEP, most policymakers anticipated that these conditions would be met sometime this year. The Committee continues to expect that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

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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